Russia’s epochal turn: back to the future

RUSSIA ECONOMICS - Report 22 Mar 2022 by Evgeny Gavrilenkov and Alexander Kudrin

As Russia’s “special military operation” in Ukraine is far from being over and becomes increasingly "special", and new sanctions keep coming, the situation looks extremely uncertain. On top of that, many foreign companies are voluntarily leaving Russia or suspending their operations almost every day. Many sectors of the economy are already affected or will be affected soon, and the worst may be yet to come as the EU countries started talking about an embargo on Russian oil. As a result of the break-up with the West, Russia in general and its economy in particular can only try to re-emerge as quite a different entity in the years to come. Therefore, due to the scale of the expected counter-transformation of the economy, any quantitative estimates of GDP contraction/growth at this stage cannot be reliable.

Russia’s hypothetical “rebirth” in the years to come will be costly and painful. Policymakers have to somehow reconsider the economic policy including its macro side. As often happens in crisis times, more support will be provided to selected companies, and, to some extent, to the population. Most likely, medium-term budgetary planning could be scrapped, the three-year rolling budget will cease to exist, and the fiscal rule will be finally abandoned. The taxation system will likely be adjusted as well to ease pressure on the mining sector.

Thanks to sanctions the government has probably awakened and realized that its Sisyphean task of building up reserves and then throwing them into black holes was not the best means of macroeconomic management. Going forward, the budget is likely to be planned nearly balanced or with a relatively small deficit easily financeable by borrowing in local currency. If so, then after another crisis year 2022, the Russian economy may re-emerge facing East Asia and turning its back to the West in the years to come. It will not be an easy transition but those who look at distressed assets can still find some assets to buy – even if others disdain them.

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