Eight questions about Russia’s economy in 2023–2024

EIGHT QUESTIONS ABOUT RUSSIA’S ECONOMY IN 2023–2024

1.  The expected total decline of Russia’s GDP by 6–8% in 2022–2023 will be largely due to supply shock (new trade barriers, decrease in the size of the labor force, ineffectiveness due to employees working outside their professional area) rather than demand shock¹. In this case, we are talking about a change in potential, not a cyclical process. Therefore, recovery must generally take place not by returning unused means of production to circulation, but instead by creating new ones or altering existing ones. This usually takes much longer than cyclical recovery, even in the absence of complications in the external environment

2. Due to the restrictions imposed on Russian exports, in particular, oil, as well as in view of its own slowdown (see Question VIII), the global economy will not be sufficient to drive Russian economic growth

1. ACRA expects the global inflation backdrop to be higher than usual in 2023. Historically, global energy price shocks have been reflected in global consumer prices and business activity for one to two years. Global prices will impact Russian prices via prices of imported goods, both for consumers and intermediate or investment goods. 

2. The Bank of Russia has stated a certain degree of tolerance to higher inflation throughout the period of ‘structural rebuilding of the economy’, i.e., it allows for a softer reaction to inflation exceeding the target. This stems from the need to adjust relative prices and the risk of inflation undershooting the target in the event of excessively aggressive measures against price growth². In particular, this is reflected in the regulator’s medium-term forecast³, which assumes that the inflation target will be reached in 2025 (in average annual terms).

3. Exchange rate pass-through effect: its influence will change from disinflationary to pro-inflationary. A weakening of the ruble looks more probable than it strengthening over the forecast horizon (see Question IV).

4. Growth of transaction costs when transport flows change. In many industries, although parallel imports help satisfy demand, as a rule, they entail an increase in prices for a comparable final product in terms of quality

On the forecast horizon, the federal budget is formed based on the following formula of maximum expenditures and the transitional fiscal rule⁴: (1) projected oil and gas revenues + (2) 8 tln rubles + (3) the projected balance of budget and official interstate loans + (4) projected debt servicing costs + (5) a special addition of 2.5 tln rubles in 2023 and 1.6 tln rubles in 2024.
Therefore, the budget deficit will automatically be equal to the following value:
special addition (main component of the amount)

+ difference between actual oil and gas revenues and 8 tln rubles

+ positive margin of error of oil and gas revenue forecast

+ actual debt servicing costs

+ actual balance of budget and official interstate loans

1. The volume of commodity exports in annual terms is likely to decrease amid new restrictions. Export prices, according to our forecast, on average will not grow above the levels of 2022, while new routes and opportunities will appear for imports. In these conditions, ACRA expects a decrease in the potential of net inflow of foreign currency to the domestic market via the channel of foreign trade in goods.

2. External and, consequently, internal restrictions on cross-border capital flows are more likely to remain than be lifted during the forecast period. There is no data on new capital restrictions at the moment, and a return to regular foreign currency operations at the Ministry of Finance and the Bank of Russia is not expected

The supply of labor over the next few years will fall more significantly than the demand for labor. The projected dynamics of the size of the active working-age population by 2024 relative to 2021 (broad indicator, age group from 15 to 72 years, including potential pensioners, only the civilian population) are as follows:

1)  From -0.8% to -1.1% due to the fact that the number of young people entering the market does not compensate for natural deaths and ageing;

2)  From -0.2% to -1.0% due to the reduction of the share of employees in the civil sphere, a relative increase in mortality and injuries, as well as increased intensity of emigration;

3)  From 0.0% to +1.2% due to additional efforts to integrate working-age immigrants

As a result, ACRA estimates that the change to the size of the active working-age population will range from -2.1% (conservative conditions) to +0.2% (optimistic conditions). In particular, in response to this, the share of wages in total production costs may increase.

The forecast also takes into account the fact that part of the GDP reduction can be attributed to capital-intensive industries (which reduces the demand for labor to a lesser extent), and workers entering and leaving the labor market have different experience and qualifications (therefore, replacing some with others may entail difficulties).

1. The higher structural deficit of the budget has increased fiscal policy’s contribution to the growth of money supply and therefore monetary policy, other things being equal, should be slightly more restrained (but taking into account the higher tolerance specified in Question II).

2. Inflation will exceed the target in the medium term

Long-term interest rates in the economic sense are a combination of expectations about the future of short-term rates, inflation expectations and all possible premiums (including risk premium, liquidity, etc.). Most of these factors have demonstrated an upward trend compared to 2021 and have limited potential for rapid decline.

The risks of these events are high, a global economic slowdown is inevitable and happening right now, but a simultaneous decline of GDP in half of the countries of the world (one of the possible definitions of a global recession) may not actually take place. See ACRA’s analytical comment from December 2, 2022 “How likely is a global recession in 2022–2023?”  for more about this.

⁵ Real growth rate according to the World Bank’s methodology
⁶ Economically active population