Amidst the blizzard, a furious debate has erupted over the performance of the Russian economy. A recent paper by five researchers at Yale University, which has garnered widespread attention, says the retreat of Western companies and sanctions is “crippling” it. Any apparent financial advantages are a mirage. “Putin’s chosen statistics are then carelessly touted in the media and used by a host of well-meaning but careless pundits to create forecasts that are overly, unrealistically favorable to the Kremlin,” the researchers argue. Others are less bleak. “The economy is not collapsing,” Chris Weafer, a respected Russia watcher, wrote in a recent paper. Where does the truth lie? After Russia invaded Ukraine, its economy went into free fall. The ruble lost a quarter of its value against the dollar. The stock market crashed, forcing regulators to suspend trading. Western companies pulled out of Russia, or promised to do so, by the hundreds as their governments imposed sanctions. Within a month, analysts revised down their forecasts for Russian GDP in 2022 from 2.5% growth to a decline of close to 10%. Some were even bleaker. “Experts predict that Russia’s GDP will shrink by as much as 15% this year, wiping out the past 15 years of economic gains,” the White House said. Both sides of the debate agree that the country is still hurting. Huge interest rate hikes in the spring, designed to stabilize the collapsing ruble, along with the withdrawal of foreign business, have pushed it into recession. In the second quarter of the year, GDP fell by 4% year-on-year, according to official data. Many of the country’s 300 one-industry cities hit by sanctions are in full recession. Many people, especially educated people, have fled. others move assets out of the country. In the first quarter of 2022, the latest data available, foreigners attracted $15 billion worth of direct investment, easily the worst rate on record. In May 2022 Russian remittances to Georgia were a staggering ten times higher in dollar terms than the previous year. But The economistAnalysis of data from a wide variety of sources suggests Russia’s economy is doing better than even the most optimistic forecasts predicted, as hydrocarbon sales have fueled a record current account surplus. Take, for example, a “current activity index” published by Goldman Sachs, a bank, a real-time measure of economic growth. This fell dramatically in March and April, if not on a scale comparable to the global financial crisis of 2007-09 or even the invasion of Ukraine in 2014. In the following months it has recovered. Other measures tell a similar story: of a recession, but not a deep one, at least by Russia’s volatile standards. Industrial production fell 1.8 percent in June from a year earlier, according to a document released by JPMorgan Chase, another bank. An index of service sector growth, compiled by sending surveys to managers, shows less of a hit than during previous crises. Electricity consumption appears to be increasing again, after an initial drop. The number of rail shipments, an indicator of demand for goods, remains stagnant. Meanwhile, inflation is easing. From the beginning of 2022 to the end of May, consumer prices rose by about 10%. The falling ruble made imports more expensive. the withdrawal of western companies reduced the supply. But prices are falling now, according to Rosstat. An independent source, published by State Street Global Markets, a consulting firm, and PriceStats, a data firm, derived from online prices, shows similar trends. In its public statements, cbr is now concerned about falling prices as well as inflation. A stronger ruble has reduced the cost of imports. And Russians’ inflation expectations have fallen. A data set from the Cleveland Federal Reserve, Morning Consult, a consulting firm, and Raphael Schoenle of Brandeis University shows that expected inflation next year has fallen from 17.6% in March to 11% in July. With plenty of natural gas, Russia is also unlikely to see a European-style spike in inflation caused by higher energy prices. Falling prices aren’t the only thing helping households. It is true that the unemployment rate, at a record low of 3.9% in June, is misleading. Many companies have laid off staff, some without pay, in order to avoid registering redundancies. But there isn’t much evidence of a labor disaster. Data from HeadHunter, a Russian jobs website, suggests that the economy-wide ratio of jobseekers to job vacancies rose from 3.8 in January to 5.9 in May – making it harder to find a job than before – and then it decreased a bit. Data from Sberbank, Russia’s biggest lender, suggests that median real wages have risen sharply since the spring. In part because the labor market is holding up, people can keep spending. Data from Sberbank suggest that in July real consumer spending was almost unchanged from the start of the year. Imports fell sharply in the spring, in part because many Western companies stopped supplying them. However, the decline was not severe by the standards of the recent recession and imports are now recovering quickly. Three factors explain why Russia continues to outperform forecasts. The first is politics. Vladimir Putin has little understanding of finance, but is happy to delegate financial management to people who do. cbr is full of highly qualified people who took immediate action to prevent financial collapse. The doubling of interest rates in February, combined with capital controls, supported the ruble, helping to reduce inflation. The general public knows that Elvira Nabiullina, the bank’s governor, is serious about keeping a lid on prices, even if that doesn’t make her a popular figure. The second relates to recent economic history. Sergei Shoigu, Russia’s defense minister, may have been on to something in February when, according to Washington Post, told the British government that the Russians “may suffer as much as anyone.” This is the fifth economic crisis the country has faced in 25 years, following 1998, 2008, 2014 and 2020. Anyone over 40 has memories of the extraordinary economic turmoil brought about by the fall of the Soviet Union. People have learned to adapt, rather than panic (or rebel). Parts of the Russian economy have moved quite far from the West. This comes at the cost of lower growth, but has made the recent increase in isolation less painful. In 2019 the stock of foreign direct investment in the country was around 30% of GDP, compared to the global average of 49%. Before the invasion, only about 0.3 percent of employed Russians worked for a U.S. company, compared with more than 2 percent across the rich world. The country requires relatively few foreign supplies of raw materials. So the extra isolation hasn’t had much of an impact on the evidence to date. The third factor is related to hydrocarbons. The sanctions have had a limited impact on Russian oil production, according to a recent International Energy Agency report. Since the invasion, Russia has sold $85 billion worth of fossil fuels to the EU. How Russia spends its hoarded foreign currency is something of a mystery, given the sanctions on the government. There is no doubt, however, that these sales help Russia keep buying imports — not to mention paying soldiers and buying weapons. Until Mr Putin is gone, Western investors will be reluctant to touch Russia. Sanctions will remain. cbr recognizes that while Russia does not rely heavily on foreign materials, it is desperate for foreign machinery. Over time, sanctions will mount and Russia will produce lower quality products at higher costs. But for now its economy is faltering. ■ Read more of our recent coverage of the Ukraine crisis.
