Page 41 - bneMagazine March 2023 oil discount

bne March 2023 One Year On I Special focus I 41
Construction has done particularly well as Putin insisted that the mortgage subsidy programme was extended that has supported development, especially in the residential sector, against the CBR’s advice, which is worried about
a bubble forming. Mortgages is one of the ways the Kremlin is stimulating the economy, as they are one of the three big drivers of economic growth and have multiple beneficial knock-on effects on other sectors and to employment as well.
But other sectors have been caught between the gaps.
“Pharmaceutical production has grown by 25% y/y, as it was one of the big winners from import substitution,” RBC’s economics editor, Ivan Tkachev said in a bne IntelliNews podcast on the impact of sanctions on Russia’s economy. “It is deceptive too, as the pharmaceutical sector was one of
the most dependent on imports for equipment and inputs, so it has
also suffered.”
War economy
Energy exports and extraordinary earnings thanks to soaring oil and gas prices obviously played a big role in propping up Russia’s economy. The economy finished 2022 with a current account surplus of an extraordinary $227bn – more than twice as much as 2021, which was itself an all-time high at $120bn. Russia’s economy earned more money than at any time since the fall of the Soviet Union in 2022, largely because of, not in spite of, sanctions.
In another quirk that leaves Russia with more money, the decision to freeze $300bn of the CBR’s money at the
start of the war was considered to be a crushing blow to Putin’s fiscal fortress. The only problem is one year on, and EU officials can’t find most of it. Of the $258bn that the Bank of Russia held
in Europe, according to its own reports, the European Union's legal service
has only been able to identify €33.8bn ($36.4bn), which was impounded.
The other $221.6bn is simply missing and presumably still under the control of Moscow.
Even if this money is found, it remains highly unlikely that the EU can grab
it and give it to Ukraine. The money has been frozen, but technically it still belongs to Russia. Governments can only seize another government’s assets if they declare war on it – something that the West has made very clear it has no intention of doing, which leaves the frozen CBR money in limbo.
President Putin’s move to put the economy on a war footing also
helped, as did industry’s scramble to retool to take account of the sudden disappearance of many essential inputs due to sanctions and self-sanctioning by suppliers. Companies chose to accelerate investments rather than delay them, and there was a mad rush to find new international partners. In one survey only 20% of companies said they were totally unable to replace banned technology imports from the West.
“Fixed investment expanded by 5.2% and government expenditure by 2.8%. Export and import data have been withheld, but RosStat reported that net trade accounted for 12.8% of GDP, up from 9.3% in 2021,” reports Peach.
However, there was a lot of pain too. On the production side, wholesale and retail trade collapsed by 12.3%, professional services fell by 5.1% and manufacturing declined 2.4%, reports Capital Economics.
“Beyond these sectors, output held up quite well. Construction expanded by 5%, mining by 0.4%, financial services by 2.8%, and most other services sectors by 2% or so. This shows how the hit from sanctions was in specific sectors, and much of Russia's economy was able to adapt,” says Peach, adding latest activity data point to a very small recovery in industry and retail trade at the end of last year.
Looking ahead, 2023 is likely to remain difficult as the outlook is beset with large unknowns. Russia's energy
sector adapted remarkably fast to the imposition of self-sanctioning of oil and successfully redirected all the crude exports from Europe to India
and China. The working assumption of most professional analysts is that it will repeat the same trick in 2023 so that the impact on budget revenues will be much milder than the collapse in oil and gas revenues seen in December and January, to prevent another large fall
in GDP. While the IMF remains upbeat and expects some small growth, most of the other forecasters are more cautious. The CBR is keeping its options open, predicting GDP change in the range
of -1% to +1%, up from its previously pessimistic range of -1% to -4%, while Capital Economics’ current working forecast is for a decline of around 2%, “which will be revised in due course,” says Peach.
“The biggest risk for Russia and Europe comes from the war in Ukraine,” says Isakov. “We are trying to understand what is going to happen in the next four, five six months and take it from there.”
Budget revenues collapse
But Russia has not come off unscathed from the sanctions. After putting 11 months of federal budget surpluses, revenues collapsed in December thanks to the first of the oil embargos. November’s budget would have been
in deficit if it hadn’t been for a one-off payment of RUB416bn by Gazprom that kept it in the black, but nevertheless it was an impressive budget performance.
And then it all went wrong. Russia’s budget lost a whopping RUB3.9 trillion ($52bn) in a month in December –
as much as the budget is expected to lose in the whole of 2023 – leaving the budget deeply in the red for the year with a 2.3% deficit.
January was no better, as the second round of oil products sanctions loomed. Usually the budget starts the year flat as most of the federal spending happens in December, but this year the government started with a RUB1.8 trillion deficit – half the total expected for the full
year in 2023 – its worst result since
the 1990s.
The ministry said the preliminary January deficit estimates included a
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