The Russian economy is suffering more than it seems

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The war and economic sanctions lead to a decrease in imports and exports to Russia.

This article was originally published on the Riddle Russia website and translated with their kind permission.

Although the end of the year is still far away and many trends may change, Without a doubt, 2022 has been quite unique for the Russian economy.. As for the depth of the economic recession, it will undoubtedly “overcome” the crisis of 2009, when the GDP of the Russian Federation fell by 7.9%. As for deglobalization, it will exceed all the parameters of 2014-2015, when Russia was first subjected to Western sanctions following the occupation of Crimea and efforts to provoke separatism in the eastern regions of Ukraine. That said, the current crisis differs significantly from the previous ones in terms of dynamics: unlike in the past, there was no sharp depreciation of the ruble (this year its value was restored, which did not happen before); the decline in stock markets has also been much smaller (a third now versus a two-fold contraction in 2014-2015 and a nearly five-fold contraction in 2008-2009). But the most paradoxical factor in my eyes is the situation of foreign trade and the balance of payments.

As we know, after the start of the war in Ukraine, the Russian authorities rushed to classify the country’s foreign trade statistics. This effort, of course, seems rather ridiculous since the statistical agencies of the partner countries continue to publish their figures (although, to be fair, we must admit that the Russian data differed from the partners’ data in most cases, to times in a rather important way). Be that as it may, data from foreign statistical agencies as well as indirect information from Russia (such as the publication of the main parameters of the balance of payments for the first semester) indicate that the foreign trade situation has been unique this year (and that will not change). until the end of the year).

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Broadly speaking, two factors come into play: the usual and the unexpected. The usual factor is the fall in imports (it was 37.3% in 2009 and 36.1% in 2015), traditionally caused by the decrease in effective demand from final consumers. During the first half of 2022, this indicator decreased by 6.55% (and 22.4% in the second quarter), and a recovery is not expected in the near future. Unlike previous crises, the fall in imports is now due not only to the fall in demand, but also to the restrictions imposed on certain goods and, in addition, to the cessation of imports of components and equipment, which were previously received via “intracompany”. trade” (for example, supplies of components for assembly of automobiles, machine tools or appliances). By the end of the year, imports could fall by 25%, although not to the levels seen in the previous two recessions (which only means that sanctions have less impact on import levels than the ruble exchange rate).

What turned out to be the unexpected factor was the export delivery situation. Indeed, all of them, with the exception of oil shipments, fell significantly in volume (between January and July, gas exports fell by 36%, those of steel and fertilizers fell by almost a third, those of coal by 29% and those of wheat 27%). Oil, on the other hand, was being shipped to Europe in ever-increasing quantities (influenced by expectations of a planned embargo on Russian supplies since early December, and by incredibly high gas prices, which made purchases attractive). of oil at almost any price). price). As a result, Russia’s oil exports to Europe recently hit new highs of 3.41 million barrels/day, with its trading discount almost halving from $34.4 to $18.7 per barrel. , meaning that total oil export revenue in the second quarter was up 20-35% from the same period last year, while gas exports were down at least four times as much. As a result, according to the Bank of Russia, Russia’s trade surplus for goods and services reached a historic level between January and July, rising from $75.7 billion to $192.4 billion, or 2.54 times higher. The government and the Bank of Russia have said that this confirms Russia’s immunity to sanctions, but I would not dare to say that a foreign trade surplus – which has happened many times in the past – can be considered a guarantee of economic well-being. be from the country

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The two main differences between the crisis that began in 2022 and the previous ones are the change in the budget situation and the situation of the real economy. Previously, with oil prices equal to or greater than $100/barrel, the Russian federal budget was never in deficit. However, in 2022, with world oil prices near record highs and gas prices hitting new highs almost every month, it will not be possible to reconcile the budget with the surplus. In July, the budget deficit amounted to 892 billion rubles, and in all probability, the surplus recorded in the first six months of the year will be barely visible in mid-September. Obviously, the current expenses related to the war in Ukraine will not be reduced, and the need to replenish the stocks of lost equipment and used weapons will require an increase in allocations to the military-industrial complex (not to mention the need for large expenses to rebuild the occupied territories and ensure the supply of new “Russian citizens”). The combination of a high foreign trade surplus (more than $60 billion per quarter) and a chronic federal budget deficit is unique in the history of modern Russia. As such, it is likely to become the “new normal” for at least a year or two.

The situation of the real economy also seems quite unusual. Unlike the crises of 2008-2009 and 2014-2015, the current situation has mainly affected specific sectors whose problems will be hidden by the authorities behind general macroeconomic statistics. The decline will not be too severe for almost all consumer-oriented industries and services, and citizens’ disposable income will not decline as sharply as GDP or the index of industrial production. The most difficult situation will be seen in equipment manufacturing, automobile manufacturing, transportation engineering, oil and gas, coal mining, wood processing, and freight transportation. The deterioration of these sectors will be largely masked by the good performance of foreign trade and the high income from exports to the federal budget, which will continue to finance social spending and subsidies to the regions.

The period after the initial impact of the crisis should also be considered. In previous crisis situations, exports (mainly of traditional Russian commodities) have been one of the main drivers of recovery and growth, as rising commodity prices and the relative balance of supply in World markets have proven to be the main source of increased income for the country’s budget and business sector. However, such a development is unlikely in the current situation: on the one hand, the world economy is slowing down (also due to the war started by Vladimir Putin) and, as it cools down, the prices of most resources provided by Russia will decrease. instead of increasing (contrary to what happened in 2010-2011 or 2016-2017). On the other hand, even the approved plan to extend sanctions against Russia (with unplanned sanctions potentially added to the mix) will force Russian suppliers out of their traditional European market, further reducing export volumes and redirecting export to markets with lower margins (in fact, Russian oil has already been delivered to India at a 30% discount, and discount rates are certainly here to stay). Therefore, it should not be expected that, as happened after 2009 and 2014, the Russian economy will come out of the current crisis thanks to a new “export wave”.

Another important circumstance to take into account is the inevitable restructuring of Russian imports. Today, it is clear that import substitution, which would allow the economy to achieve a substantial level of self-sufficiency (instead of simply providing a high proportion of value added locally while remaining dependent on critical components), cannot be realized. This means that the government will have to resort to “parallel imports”, which involve more complex logistics circuits and a whole chain of intermediaries. This will lead to a significant increase in supply prices compared to pre-crisis levels (price increases will average 20-25%, especially as many products cannot be purchased from manufacturers in large quantities). Consequently, the record foreign trade surplus achieved in the summer of 2022 could be drastically reduced by the end of 2023, as all the aforementioned export restrictions come into force, “parallel imports” develop and the industrial sector, which has almost ceased to matter. , you must renew your equipment.

By internally regulating the foreign exchange market and manipulating export prices in the main foreign market, Europe, the Russian authorities have managed to ensure that the 2022 crisis has practically none of the characteristics that marked previous recessions. This tactic is now yielding impressive results, with a cheap dollar and a huge surplus. But at the same time, this tactic lays the foundation for a future strategic defeat due to rising prices on the domestic market (today a Lada Vesta costs 2.4-3 million rubles, or 40-50 thousand dollars, compared to 1-1.1 million rubles , or 14-16 thousand dollars in January) and the loss of ground in external markets (in niches and prices). While rejoicing at the price of gas in Europe, which has reached 3,000 USD/thousand m3, and the record successes of foreign trade, the Russian authorities and the country’s experts do not see the combination of factors emerging that will boost the country’s economy. to a true disaster between 2024 and 2025.

Translated and published with the kind permission of Riddle Russia. The original article can be found HERE


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