Page 19 - Russia OUTLOOK 2023

“This is an unpleasant recession but it's still manageable,” EBRD chief
economist Beata Javorcik told bne IntelliNews in an interview, pointing out that
it was less than some Western European economies contracted during the
worst of the coronavirus (COVID-19) pandemic. “The initial expectations that
sanctions would result in a financial and economic crisis were not realistic,”
she said.

Many factors have gone into holding up the economy. The extremely high
price of energy and commodities have sent a flood of money to Russia as oil
exports rapidly recovered over the summer as deliveries reorientated to Asia.

Import substitution via markets like Turkey also meant many of the inputs that
disappeared in the first months of the war reappeared. At the same time,
Russian firms were successful in finding new suppliers for many of their inputs.
The strength of Russian companies also helped her with offsetting the higher
transport costs. Domestic output has also been boosted as local producers
stepped into some of the niches.

However, Javorcik argued that sanctions were still severely hitting the
economy. “Where you see sanctions working is in the fact that there is a bigger
decline in manufacturing output in industries that rely on imported inputs than
in manufacturing as a whole,” she said.

Russia's GDP growth will be awful in 2023. That's because there's a big
negative base effect from the drop in 2Q2022 GDP, so – even if GDP stabilises
towards end-2023 – annual average growth will be -5%, says Robin Brooks of
IIF.

The economy was already slowing in the last quarter of 2022. According to
preliminary data from the Ministry of Economy and RosStat, Russia's GDP has
shrunk by 4-5% y/y in the last months of 2022. The Ministry of Finance's
preliminary estimate indicates that a similar decline continued in October as
well. In the most recent forecasts, Russia's GDP is typically expected to
contract by 3-5% both this year and next year.

Economic development has continued to be weighed down, especially by
weak consumption. The amount of retail sales in October was still 10% lower
than a year earlier. Inflation has remained rapid and has eroded the
purchasing power of Russian consumers. In October, consumer prices rose by
13% y/y.

The labour market situation has remained tight. The unemployment rate is still
historically low at around 4%. Russia's partial mobilisation has partly reduced
the workforce, as hundreds of thousands of working-age men have been sent
to the front and fled the country.

In October, the economy was mainly supported by the industrial sectors linked
to business launch and the military industry, and construction. For example,
the clothing industry, metal processing, and the manufacture of electronic and
optical equipment grew rapidly from the year before. However, the production
of the entire processing industry shrank by 2%.

19 Russia OUTLOOK 2022 www.intellinews.com