The past year has been bruising for Russia’s economy. Foreign investors fled en masse, many never to return. Official forecasts suggest that few countries will see their gdp shrink by more this year. Only a handful of countries, including war-torn Ukraine, will end up posting worse numbers.
From another perspective, however, Russia did surprisingly well. In the days following its invasion of Ukraine in February, there was financial chaos from Moscow to Vladivostok. After Western countries imposed an unprecedented number of sanctions, the stockmarket collapsed along with the rouble. At the time it seemed Vladimir Putin’s “Fortress Russia” was crumbling.
Economists quickly downgraded their forecasts. Within days the consensus estimate of annual gdp growth in 2022 dropped from 2.5% to a contraction of 10%. Some economists were even gloomier: the White House looked for a year-on-year decline in Russian gdp of 15%. Inflation surged across the country.
Russia faced a squeeze on both the supply and demand sides of the economy. Western businesses were pulling out by the dozen, limiting what Russians could buy. Meanwhile the central bank doubled interest rates, raising debt-servicing costs and thus further squeezing demand.
Within a few weeks, however, it became clear that the worst forecasts were not going to come to pass. Sanctions have gravely damaged parts of Russia’s industrial base, such as the car sector, which relies on foreign parts. Others, in particular those enjoined by the state to help out with the war effort, have not done too badly. During the summer and the autumn economists revised up their growth forecasts. Now they expect the Russian economy to shrink by some 3-4% this year. Unemployment has barely budged, in part because firms have been told to keep workers on, even if on lower or no pay.
Two main reasons explain why Russia’s downturn has proved shallower than expected: policy and trade. In the early days of the invasion the quick actions of the central bank and regulators convinced ordinary Russians that they were serious about tackling surging inflation. Inflation expectations, having jumped, came back down again. Higher interest rates encouraged the public to return money that they had taken out from their bank accounts in the early days of the covid-19 pandemic, preventing a financial crisis.
Sanctions have been tough, but for most of 2022 there were few restrictions on the sale of hydrocarbons (that is now changing). So far this year, Russia has racked up a current-account surplus of over $220bn, twice its level the year before.
This foreign currency has helped finance imports. Many Western firms have stopped selling their goods and services to Russia. But companies in other parts of the world are only too happy to help—China’s, for instance, have stepped up. Turkey appears to have become a go-between for Western companies looking to skirt sanctions. Russian imports have recovered a long way after a sharp drop in the spring.
“Real-time” economic data paint a concerning picture for the West. At present, the Russian economy is in better shape than expected. Meanwhile Europe, weighed down by sky-high energy costs, is falling into recession. ■