Page 40 - bne Magazine February 2023

40 I OUTLOOK 2023 bne February 2023
RUSSIA
The Russian economy is starting 2023 in a far better state than many had anticipated in the spring following the invasion of Ukraine and ensuing Western sanctions. The fall in GDP has only amounted to about 3% or even less, and the US dollar is still trading at less than 65 rubles. Even the Western ban on high-tech imports, although challenging, has proved manageable. But none of this means that Russia’s economy is out of the woods: many risks still remain. We asked economists from Russia’s leading investment banks to highlight the new warning signs that have emerged in recent months.
Oil and gas revenues started to fall sharply. In November, oil and gas revenues contributed RUB866 billion ($13 billion) to the state budget – down 2.1% year on year. This is not a critical fall in revenues. However, in reality, almost half of that sum ($6.4 billion) came from a one-off payment of Gazprom’s mineral extraction taxes. Without that money, oil and gas income was down 48.9% compared with 2021.
There are two possible reasons for this. First is the near-total cessation of pipeline gas exports to Gazprom’s lucrative European market following the closure and subsequent explosions on the Nord Stream gas pipeline. Second is the fall in prices for Russian oil, which led to November’s oil revenues being down 25.4% y/y.
Russia’s finance ministry is printing money to cover this deficit. Part of the hole can be filled using the National Welfare Fund, but this alone will not be enough. Relying solely on the NWF would mean the liquid part of that fund would run out by 2025, according to the projected budget deficit, central bank analysts reported.
This fall, the finance ministry turned to large-scale borrowing in the federal loan bond market to cover the rest of the deficit. These internal loans raised RUB1.44 trillion ($22 billion) for the ministry. Of this sum, 77% derives from bonds floating rates, which will ultimately be tied to central bank rates. The main buyers of these bonds were leading banks, which previously borrowed RUB1.39 trillion ($21 billion) through repo transactions. Therefore we are effectively looking at hidden money emission.
This has obvious consequences: it will likely increase inflationary pressure, forcing the central bank to
raise interest rates and sacrifice economic growth. However, not every economist regards this scheme
as inflationary. Economist Viktor Tunev believes that, from the point of view of modern monetary theory, this borrowing algorithm will have no significant economic
consequences. He calls these loans “Russian QE”: the central bank creates liquidity in the form of federal loan bonds, simultaneously improving standards in assets and enhancing money supplies to the banks’ liability without involving capital.
Unemployment levels in Russia remain close to historic lows even as foreign companies have left the market and factories have closed. The latest official figures show that 3.9% of the workforce was unemployed in October (the all-time low of 3.8% unemployment was set in August).
There are several possible explanations for this paradox. First, Russia’s labour market always responds to a crisis by cutting salaries first, not jobs. Second, the low level of benefit payments in Russia means that people who do lose their jobs are likely to grab any job they can as soon as possible.
On top of this, Russia launched its military mobilisation amid this “compressed” labour market, said Rostislav Kapelyushnikov, deputy director of the Center for Labour Market Studies at Moscow’s Higher School of Economics. The loss of approximately 1-1.5 million people from the labour market due to war-related mobilisation and emigration will exacerbate the situation with a growing pool of unfilled vacancies.
This serves as a wake-up call that Russia’s labour resources are limited, says Alexander Isakov, an economist specialising in Russia and Central & Eastern Europe at Bloomberg Economics. Because there are no
“Unemployment levels in Russia remain close to historic lows even as foreign companies have left the market and factories have closed”
spare resources in the economy, mobilisation requires those working in “productive” industries (such as processing, construction and transport) to be diverted into the state sector. All of this impedes potential economic growth: increased defence and public sector spending have structural side-effects that will limit potential annual growth to about 0.5% over the coming five years, Isakov says.
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