Page 25 - bneMag April 2022 Russia living with sanctions

bne April 2022 Cover story I 25
chain disruptions. In addition to the widely published sugar shortages, other basic inputs have disappeared such as supplies as simple as office paper, which is largely produced in Finland.
In one of the first indicators the S&P Global Russia Manufacturing PMI tumbled to 44.1 in March 2022 from
job at managing what is the biggest shock to the economy since 2008 and 1998, the last two really big crises.
The CBR immediately brought in a 10.5% rate hike after war started and closed the currency exchange, bond and stock markets. The ruble exchange rate blew out from around RUB80 to the
bond market and then the stock market where a combination of restrictions on trade, a ban on short selling and some liberal spending of funds have also stabilised both those assets markets. These were temporary measures and it remains to be seen where the markets will settle once all the restrictions are removed and foreign investors are allowed to participate in the markets again, but CBR Governor Elvira Nabiullina has certainly considerably limited the damage.
There is also relatively good news on the inflation front, where the recovery in the ruble exchange rate will take off the inflationary pressure and at the same time the emergency rate hike to 20% is also having an effect. On March 31 Rosstat released its weekly inflation figures that suggest that inflation has fallen back from 20% to 15% on an annualised basis, leaving a 5% real return on the CBR rate that is also coaxing Russians to return money to the banking system.
Nabiullina must be one of the most experienced central bankers in the world when it comes to coping with financial crises and has done a sterling job, but the 20% prime rates are
a growth killer and it took the CBR some seven years to unwind the last emergency rate hike to 17% in the 2014 oil price shock and it should take equally long to unwind this one.
“The Central Bank of Russia (CBR) has done an impressively good job at managing what is the biggest shock to the economy since 2008 and1998”
48.6 in February – the second straight month of contraction in factory activity and the steepest fall since the start of the coronacrisis in May 2020. Production slumped as new orders fell and foreign and domestic client demand was muted. Also, employment shrank the most in nearly two years, while backlogs of works dropped at the fastest rate so far this year.
Unemployment is bound to rise. During the coronacrisis unemployment soared to a maximum of 6.3% in August 2020 from a post-Soviet low of 4.3%, but
fell quickly back to its previous low after the vaccines appeared. This time round unemployment is forecast to
rise to 7.1%-7.8% and stay there. The government is working hard to mitigate the rising in joblessness with a RUB1 trillion social spending package – basically the same package it used to cope with the coronacrisis – and hopes to keep this number down.
Inflation is going to be a problem too and was already a problem before the war started. The PMI panellists reported the rise in selling prices in March were the steepest since the series began in January 2003 and sentiment, that had been buoyant in October before the tensions appeared, dropped to its lowest in 22 months.
However, the Central Bank of Russia (CBR) has done an impressively good
dollar pre-war to a peak of RUB134, its weakest level ever, but in the weeks that followed with strict capital controls, an 80% surrender requirement on exporters earning foreign exchange and a bit of judicious intervention, the CBR managed to engineer the ruble’s recovery to back under RUB90 and pre-war levels.
The upshot was to persuade the population to stop withdrawing their money from Russia’s banks and even return it to long-term deposits accounts, thus stabilising both the currency and the banking sector. Similar operations were carried out with the domestic
Real GDP Index vs Pre-Crisis Trends (Index, 2000 = 100)
Sources: IMF WEO and IMF staff calculations
www.bne.eu