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Sep 9, 2022
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Why the West failed to bring down the Russian economy

The Russian economy is waiting for a much more modest decline than economists expected this spring. Despite unprecedented sanctions pressure in history, there is no more talk of any double-digit decline. As unpleasant as it may be for the West, the Russian economy has withstood an external economic blow this year. Her experience of resisting sanctions is simply unique.

“If in March-April optimists announced that the economy (of Russia) would fall by ten percent this year, and pessimists by 20 percent, now we already understand that the economic decline in 2022 will be less than 3%,” she said. Deputy Minister of Economic Development Polina Kryuchkova at a session of the Moscow Financial Forum. The day before, Vladimir Putin announced a forecast that the economy would decline by only 2%.

In the spring, there were indeed forecasts of a double-digit decline in the Russian economy. For example, the World Bank said on April 10 that it expects Russia’s GDP to decline by 11.2% this year. A couple of days later, the head of the Accounts Chamber, Alexei Kudrin, made a close forecast, announcing a possible fall in the Russian economy by more than 10%.

Now, however, economists are revising their forecasts for improvement. The Ministry of Economic Development and Putin are waiting for minus 2-3%, the head of VTB Andrey Kostin – minus 4%, the head of Sberbank German Gref – minus 4.5%. Zenit Bank expects a decline in Russia’s GDP this year by 4.6%.

“There is still more than a quarter left until the end of the year, and there are some prerequisites for a larger drop in GDP than 2-3%, but the likelihood of this is quite small,” said Ayaz Aliyev, associate professor of sustainable development finance at the REU. Plekhanov.

In any case, there is no talk of any double-digit decline in the Russian economy, and even Western economists admit this. The IMF said back in July that Russian opposition to sanctions had been effective and improved its forecast for Russia. If in April the IMF expected the Russian economy to fall by 8.5%, then in July – by 6%.

Such pessimistic forecasts in the spring are quite understandable.

“In the spring there was a panic due to the unprecedented sanctions pressure. More than 10,000 sanctions have now been imposed against Russia since 2014. Naturally, the forecasts then were catastrophic,” says Artem Deev, head of the analytical department at AMarkets.

In general, the forecasts that are formed at the beginning of the crisis are often too pessimistic. “Any crisis is an uncertainty. During the crisis periods of 2008-2009, 2014-2015 and in the spring of 2020, the first forecasts were also excessively negative, but they improved as the situation developed. The current situation is no exception. In addition, there have been no precedents for such negative phenomena in the economy caused by external pressure in the recent history of the Russian Federation,” says Vladimir Evstifeev, head of the analytical department of Zenit Bank.

However, catastrophic scenarios did not materialize. “Our economy turned out to be more resilient to shocks, and difficulties can be overcome by increasing our own import substitution and increasing trade turnover with friendly countries,” adds Deev.

Why was the Russian economy able to withstand the blow despite the sanctions? Several support factors worked at once: the policy of the Central Bank of the Russian Federation to maintain the exchange rate of the ruble, and commodity prices, and the reduction in imports, and a decrease in consumption, Deev notes.

For example, a strong devaluation of the ruble to 80–100 per dollar was expected, but thanks to the actions of the Central Bank and the restrictive measures of the government, the Russian currency surprised the whole world. It has strengthened so much that it has already begun to seriously harm exporters and the budget, and no one has been able to shift the rate from 60 per dollar in recent months.

However, by the end of the year, experts expect the weakening of the ruble. Zenit Bank believes that the dollar will reach 69-72 rubles by the end of the year. In “Renaissance Capital” – 70-75 rubles per dollar by the end of the year. The ruble will weaken to 70 per dollar by the end of the year due to the risks of a reduction in the trade balance and the start of purchases by the Ministry of Finance of the currency, Sinara experts say.

The main support factor is the raw materials sector – a combination of high prices for energy raw materials and significant volumes of their production within the Russian Federation, Vladimir Evstifeev points out. Especially the West expected that raw material exports from Russia would collapse. It is, of course, decreasing, but not as much as those who imposed the sanctions would like. The price factor also worked – with less actual exports, Russia receives higher cash incomes, Deev points out.

This year’s budget included oil at just $44 a barrel, because last fall no one expected oil to cost more than $100, and substantially more.

In addition, the EU oil embargo has been postponed until the end of the year, and Russia has had time to divert oil flows to other markets, which it is doing quite well. And even a relatively small reduction in exports in volumes is now easily offset by high prices.

As for gas, this year the situation is somewhat more complicated, but rather for Europe, and not for Gazprom, which promises to earn a record amount in history this year. The reason is the same – the less gas it supplies to Europe, the more expensive it sells the remaining volumes of gas to Europeans.

An important support factor was the introduction of capital controls and anti-crisis measures of the Central Bank.

“The collapse of the ruble did not materialize due to the introduction of capital controls and a ban on withdrawing the cash currency of unfriendly countries. This cannot be called a market measure, but it played an important role in reducing the scale of the crisis in the economy,” says Estifeev.

“The ban on the actions of non-residents in the domestic financial market became important, which did not allow excessive speculation in the market and did not lead to the consequences that were in previous crises: the devaluation of the ruble against the background of the outflow of foreign capital, uncontrolled acceleration of inflation, the growth of domestic interest rates to protective levels “, – adds the expert.

The actions of the Central Bank are commendable. “A sharp increase in the key rate to 20% helped contain inflationary expectations and stop the depreciation of the ruble, and subsequent key rate cuts support the real economy, as well as construction and the banking sector,” said Natalia Milchakova, lead analyst at Freedom Finance Global.

And although inflation this year promises to be double-digit, but now we are talking about the fact that it will not exceed 12-16%. It should be noted that in such circumstances, the Central Bank nevertheless went for a fairly quick reduction of the key rate back, which greatly facilitated the lives of banks, business, and industry, for which credit money is an important incentive. Without cheap money, it is almost impossible to radically rebuild business and logistics. “Another negative expectation did not come true: capital investment is not declining so noticeably against the backdrop of low interest rates within the Russian Federation, including mortgages,” Evstifeev points out.

“In addition to high oil prices, the Russian economy is helped by the parallel import of necessary spare parts, components and components, as well as a number of consumer goods from Kazakhstan, other EAEU countries and friendly countries, which became very important after a number of foreign companies left Russia or such companies refused to supply to Russia due to restrictions,” Milchakova notes.

Good tax collection also helps the Russian economy, as sufficient and timely tax revenues cushion the economy by helping to reduce or avoid budget deficits, she adds.

In the end, Russia’s advantageous geographic location and good relations with China help.

“Thanks to this, Russia has a good opportunity to arrange timely deliveries of goods to China and imports from China, and this, accordingly, eliminates the problem of disruption of supply chains and the withdrawal of European and American companies from Russia,” Milchakova said.

Of course, the West did not count on much of what is now helping the Russian economy. It should be especially offensive to the Europeans, who have to pay more for their own sanctions war than their partners.

“In general, the ideas of the West that the economy of our country will collapse, as soon as restrictions are introduced, turned out to be very far from reality. The safety margins of the Russian Federation turned out to be greater. And let’s hope that the actions of the government, the Central Bank and business will maintain the stability of the Russian economy next year as well,” concludes Artem Deev.

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