Russian macro: Economic performance in 2022 exceeds gloomy expectations, future trends remain uncertain

RUSSIA ECONOMICS - Forecast 20 Sep 2022 by Evgeny Gavrilenkov and Alexander Kudrin

On September 16, the Russian Central Bank decided to cut its key rate by 50 bps and brought it down to 7.5%. The regulator mentioned that Russia’s economic performance in 2022 looks better, so far, than had been expected earlier and announced that it will publish an updated macroeconomic forecast for 2022 and some years beyond in October. The regulator announced that it expects inflation to stay within the 11-13% range this year and within 5-7% next year. The general perception is that Russia’s GDP contraction in 2022 won’t be as deep as had been expected earlier, and top government officials hinted several weeks ago that the economy may contract by two to three percent this year. The available 7M22 statistics support this view, especially if we assume that Russia faces no further serious shocks from the decision-makers in “unfriendly” jurisdictions. Even though this assumption is based on shaky ground and sanctions will keep coming regularly this year and beyond, it is hard to envisage which sectors of the economy will be hit by them. In any case, the major impact of the forthcoming sanctions will not be felt until 2023. As imports of goods shrink this year, the current account surplus may widen to an unprecedented $250 bln while the surplus of goods and services trade balance could move to around $300 bln. Next year things are expected to change amid the ongoing divorce between Russia and the EU, and the external surpluses are likely to shrink as finding new trade partners and establishing relations with them (including building infrastructure and arranging logistics) takes time.

On the domestic front, the authorities have developed a number of long-term programs aimed at reducing the country’s dependence on imports in some crucial sectors, such as aviation, microelectronics, semiconductors, etc., but these plans are unlikely to deliver meaningful results in 2023. A gradual adjustment of the Russian economy to the new realities seen in 2022 may abruptly turn into something different in the aftermath of the forthcoming referendums in Donbas and several other neighboring territories as it will mean further escalation of the conflict between Russia and the West to a more dangerous level.

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