Charting a course

¹ Real growth rate according to the World Bank’s methodology
² Economically active population

THE RUSSIAN ECONOMY ON A THREE-YEAR HORIZON

The ranges of future values of macroeconomic indicators are given in Table 1. They should be viewed as the most probable under the unchanged assumptions of the base case scenario.

In its updated macroeconomic forecast for 2024–2026, ACRA continues to expect positive economic growth in the forecast period, while in the next few years the process of structural transformation will be accompanied by higher interest rates, rising labor costs in real terms, and budget deficits.

In addition to these structural trends, the economy will undergo other processes described below.

1. High utilization of existing capacity and labor resources will continue. Capacity and labor utilization have now reached historically very high levels (Fig. 1) due to the combination of the post-pandemic situation in 2021 and growth in demand from the state in 2022–2023. This means that future economic growth will be limited by supply, and as a result, GDP growth rates will decline from around 3% in 2023 to closer to the potential 1–2% over the forecast horizon (around 1% in 2024). For the economy in general, the only real sources of sustainable growth are labor productivity, human capital and intersectoral efficiency of use of production factors. As in other countries with post-industrial stage demographics, migrations trends will likely have an increasingly strong influence on economic policy.

The levels of underutilization of capacity and labor are calculated as the difference between “natural” levels of their utilization estimated by ACRA and the observed real levels.

Figure 1. The utilization of factors of production in the Russian economy is high and will remain high during the forecast period

Sources: Rosstat, Bank of Russia, ACRA

2. Short-term interest rates will decline from 15–16% to around 7%, which can be considered neutral in the medium term. This will happen over a horizon of two or two and a half years in the absence of new shocks and if budget consolidation plans remain in place. Longer rates will decrease over the same period by approximately 4 percentage points (for five-year OFZs — from 12% to 8–8.5%). In real terms, this means a return to the levels of 2017–2018 (Fig. 2). Budget policy and foreign trade shocks may have a substantial impact on these dynamics — in the event of higher budget deficits relative to the published targets or lower volumes of exports, interest rates will decline at a slower rate.

Real interest rates are the difference between nominal interest rates and either inflationary expectations (ex-ante) or inflation for the previous year (ex-post).

Figure 2. Real interest rates (5-year zero-coupon OFZs)

Sources: Bank of Russia, ACRA

The last scheduled meeting of the Bank of Russia in 2023 on the key rate may result in it either being increased (probably the final hike in the current cycle) or left unchanged. The general inflationary backdrop continued to heat up in the second half of the year — two out of three percentage points of increase in annual price growth rates in the second half of the year were associated with faster growth in aggregate demand; only one percentage point can be explained by the effect of last year’s base volatility.

3. Household consumption in real terms will remain unchanged or decline slightly in 2024. With real disposable income growth slower next year compared to 2023, savings rates are likely to increase as well, in response to high short-term interest rates and macroprudential measures that tighten approaches to household lending.

The savings rate is the portion of income that is not used to purchase goods and services in the same period in which this income was received (month, quarter, year).

Figure 3. The household savings rate will again grow temporarily

Sources: Rosstat, ACRA

Monetary policy, in turn, is responding to the growth in demand observed in 2023, which significantly exceeded the possibilities for increasing output and consequently caused increased inflation. In 2025, ACRA sees opportunities for renewed growth in real consumption due to another reduction in the savings rate.

4. In the short term, the currency exchange rate will remain at around the current level, while in the long term, it will tend to weaken. The mandatory sale of foreign exchange earnings by the largest exporters, currency purchases suspended by the Bank of Russia, and key rate hikes that impair consumer imports may jointly result in an exchange rate of 85 rubles to the dollar (11.6 rubles to the yuan) in late 2023–H1 2024. At the same time, ACRA is of the opinion that, in the medium and long term, conditions for relatively rapid exchange rate fluctuations in the domestic foreign exchange market (by 5–10%) will remain. Long-term factors facilitating the ruble weakening in nominal terms will also be relevant. Among other things, these include, first, growing domestic demand and, as a result, demand for imported goods and services, which outstrips the increase in export potential (including due to a slowdown in the world economy and trade); second, the steady difference in average inflation rates in the country and in trading partner countries.

The line on Fig. 4 shows the annual average inflation rate in Russia. Colored areas show inflation by country. The darkest area is central 10% of the distribution around the median, each layer covers 5% of the distribution. The total colored area shows the central 90% of the distribution.

Figure 4. Inflation rates in Russia and other countries (annual average CPI, % y-o-y)

Sources: IMF, Rosstat, ACRA

mandatory sale of foreign currency earnings by exporters. context

On October 11, 2023, a decree on the mandatory repatriation and sale of foreign exchange earnings by large exporters was adopted in Russia. One of the reasons for this measure was the fact that from H2 2022 to mid-2023, the share of exporters’ foreign exchange earnings sold in the domestic market decreased³ from 85–88% to 67–70%, which coincided with the ruble weakening. However, there were other notable factors that impaired the equilibrium in the domestic foreign exchange market. The decree has improved the liquidity situation in the market, but in the medium and long term, this measure will contribute to lower volatility of the ruble exchange rate rather than a stronger ruble. The mandatory currency sales, on the one hand, increase the supply of foreign currency, and on the other hand, contribute to stronger demand at least from exporters selling foreign currency. Theoretically, a long-term effect on the exchange rate would arise out of a set of measures that hamper capital outflows.

Significant fluctuations in the share of actually sold foreign exchange earnings cannot a priori be called a negative event since they are part of the floating exchange rate regime. Moreover, they are also observed in countries with other currency regimes. For example, in China, the share of earnings sold by exporters in the domestic market decreased from 70–75% to 60%⁴ between 2010 and 2016 (the scale of the fall is comparable, in relative terms, to that in Russia). Against this background, as well as in view of other factors of the yuan weakening that took place in 2015–2016, Chinese regulators tightened some controls over cross-border capital flows and applied macroprudential measures to limit banking sector risks associated with currency revaluation. At the same time, the share of currency sales remained depressed until at least 2018.

Over the past 15 years, about 90 countries with different currency regimes have imposed certain restrictions on exporters’ foreign exchange transactions. Out of these, 50 to 60 countries combined mandatory repatriation with the sale of currency earnings (in Russia, a similar regime existed until 2006 and in early 2022, in Kazakhstan one was in place in 2020–2021)⁵. About 30 countries did not introduce the sale of currency, but required foreign exchange earnings to be repatriated. Finally, only two or three countries required sale without repatriation. The most typical average mandatory sales levels are 50% and 85–100% (predominant) of export earnings. Currently, a 72% share is applied in Russia: 80% of foreign exchange earnings are subject to repatriation, 90% of which exporters are obliged to sell in the domestic market.

In about half of the cases, the requirements to sell foreign currency differ by industry (as a rule, depending on the share in total exports) or sector (public, quasi-public, private), which contrasts with the criteria formally applied in Russia (the size and share of exports in earnings). Statistics show that these requirements are almost never introduced in the short term and in isolation from other capital movement controls. On the contrary, as an instrument of monetary policy, they often persist for many years, since exchange rate regimes tend to change slowly.

³ In November, the share of earnings sold by exporters grew again, but its precise value is to be determined.
⁴ Sonali Das. China’s Evolving Exchange Rate Regime / Sonali Das. // IMF Working Paper WP/19/50, March 2019.
⁵ The Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), IMF.