Page 34 - bne IntelliNews monthly magazine May 2024

34 I Cover story bne May 2024
3.6% for the full year after the economy got a Keynesian boost from the heavy state military spending.
This year that strong economic growth is expected to continue. The Central Bank of Russia (CBR) forecasting a modest 2.2% growth in 2024 in its April macroeconomic survey, but the International Monetary Fund (IMF) just upgraded its Russian economic outlook from 1.1% to 3.2% in 2024, making Russia the fastest growing large economy in the world this year. And Russian Finance Minister Anton Siluanov also increased his growth forecast to 3.6% – the same as last year.
The military Keynesian effect appears to be very strong. And it is being helped by a growing consumer boom. As the table shows, while most commentators focus on Russia’s dependency on oil and gas revenues, they only account for about
a third of the tax take. The other two thirds is from non-oil and gas revenues, which was up a healthy 43% in the first three months of this year. More than half of the non-oil revenues are from VAT, which was up by nearly a quarter.
Inflation is running high at 7.7% in March, which has forced the CBR to hike the prime rate to a crushing 16%. But the acute labour shortage caused by the war sent nominal wages up by 14.1% in 2023 and they are predicted to increase by 10.4% this year, while inflation is anticipated to fall to 5.2%, according to
Russia External debt vs GIR $bn
the CBR’s survey. That means real wages in Russia are growing strongly and fuelling a consumer boom. Real wages were up a whopping 7.8% last year, despite the high inflation, and
the CBR says they will climb by at least 3.2% this year.
All that consumption is driving the healthy VAT collections that may end the year some three times higher than oil and gas receipts, according to MinFin’s budget assumptions for this year.
After the imposition of extreme sanc- tions at the start of the war in Ukraine, economists cut their estimates of Russia’s growth potential from 1%-1.5%
German Defence Minister Boris Pistorius said that Russia is already producing more weapons and ammunition than it needs for conducting an aggressive war against Ukraine on April 25.
With the increased spending on armaments and the streamlining of the military economy, "a significant portion or part of what is produced no longer goes to the front line, but ends up in warehouses".
Siluanov estimates that the budget deficit will fall from last year’s 1.9%
of GDP to 0.8% this year and that the budget will be balanced in 2025 – and this assuming the war is still going on.
“At the same time, Russia has been reducing
its external debt to the point where debt it can pay off almost its entire debt worth 14% of GDP tomorrow in cash”
pre-war to 0.3%-0.5%. However, thanks to the supercharging of the economy
as the Kremlin switches tactics from hoarding money to build up $600bn of CBR reserves and is now spending freely with heavy investments to militarise the economy, some economists now estimate Russia’s economic growth potential has risen to 3.5%.
Putinomics
The Kremlin has fundamentally changed its economic strategy. Since Russian President Vladimir Putin began to rearm and modernise the military in around 2012, as bne IntelliNews reported in a cover story 'Cold War II' at the time, Russia has been hoarding money to make itself sanctions-proof and has built a Fiscal Fortress.
At the same time, Russia has been reducing its external debt to the point where it can pay off almost its entire debt worth 14% of GDP tomorrow
in cash.
However, the big change is that the Kremlin has started to leverage its economy for the first time since Putin took over by increasing its borrowing from the domestic markets, albeit still conservatively.
The two core principles of “Putinomics” have been: build up massive reserves that topped $600bn pre-war, or nearly two years’ worth of import cover, where
Source: MinFin
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