In the two years since Vladimir Putin's invasion of Ukraine, the Russian economy has time and again defied the doomsayers. The widely predicted financial collapse in spring 2022 never came to pass. The economy entered a recession, but it was somewhat less severe than expected and did not last long. Inflation has been the most recent scare. Last year prices accelerated rapidly; economists believed they could get out of control. Even Putin was worried. In February he urged officials to pay “special attention” to rising prices.
However, once again, the Russian economy exposes the pessimists. Data due on March 13 is expected to show prices rose 0.6% month-on-month in February, down from 1.1% at the end of last year. In year-on-year terms, inflation is likely to stop rising, after reaching 7.5% in November. Many analysts expect the rate to soon decline to just 4%, and household expectations about future inflation have stabilized. The outcome of the Russian presidential election, which begins on March 15, is decided. If they were competitive, these figures would not harm Putin.
Russian inflation soared last year due to higher fiscal spending than during the Covid-19 pandemic. As Putin escalated his invasion of Ukraine, spending increased on everything from transportation equipment and weapons to soldiers' salaries. Total government disbursements increased by 8% in real terms. Demand for goods and services soared above the economy's ability to provide them, prompting sellers to raise prices. It became especially difficult to find workers; among other reasons, because hundreds of thousands were called up and tens of thousands fled the country. In October last year, nominal wages grew at an annual rate of 18%, compared to 11% at the beginning of the year. That caused price inflation in labor-intensive services, such as healthcare and hospitality.
Who gets the credit for the change in trend? The Ministry of Finance claims its role. Last year its officials successfully lobbied for exchange rate controls, which force exporters to deposit foreign currency into the Russian financial system. That move likely served to support the ruble, which has appreciated in recent months, driving down the price of imports.
Central Bank officials consider their counterparts in the Ministry of Finance to be economic ignoramuses who meddle in the markets at their own risk. They believe that it is their policy (of more than doubling interest rates from July 2023) that must be given credit for the drop in inflation, and they are probably right. Higher rates have encouraged Russians to put money in savings accounts rather than spend it. Tighter monetary policy has also helped curb lending. In December, retail loans grew 0.6% month-on-month, down from 2% for most of 2023.
Very few central banks have been so tough. However, Russia appears headed toward a “soft landing,” in which inflation is curbed without crushing the economy. The economy's performance is now in line with its pre-invasion trend; GDP grew in real terms by more than 3% last year. Unemployment remains at historic lows. And there is little sign of business difficulties; In fact, the business closure rate recently hit the lowest level in eight years. The Moscow Stock Exchange expects to see more than 20 initial public offerings this year, up from nine last year. The latest “real-time” data on economic activity is reasonably solid. Consensus Forecasts' forecasts for 1.7% GDP growth this year seem too pessimistic.
Russia's economic resilience is partly a consequence of past stimulus. In recent years, businesses and households have built up large cash balances, allowing them to continue spending even in the face of high inflation and avoid defaulting in the face of high borrowing costs. As in other parts of the world, the fall in demand for labor has translated more into a decline in unfilled vacancies than into fewer people employed. Figures from HeadHunter, a recruitment website, indicate that the ratio of job vacancies to job seekers has stopped increasing. Having struggled to find workers in recent months, employers are reluctant to let go of employees unless absolutely necessary.
Sanctions have also boosted the economy. Russian production facilities previously owned by Westerners have reopened under new management, the Central Bank says in a recent report. At the beginning of the war, sanctions made it difficult for Russian companies to obtain supplies, delaying production. However, companies have now established long-lasting supply chains with “friendly” countries. More than half of goods imports come from China, twice as much as before the invasion.
As new trade relations have taken hold, Russian exporters have dared to raise prices, boosting revenues and profits. The discount on oil offered by Russia to Chinese customers, for example, has fallen from more than 10% in early 2022 to around 5% today. And it's not just about oil. Putin boasts about increased ice cream exports to China, and last week he noted that he had “invited my friend, President Xi Jinping” with ice cream.
As every Russian knows, inflation is never truly defeated. Central Bank officials remain concerned that inflation expectations are too high. The biggest fear is that the ruble will depreciate, whether due to lower oil prices, another round of major sanctions or less interest from China in supporting Putin. These are serious concerns. However, the world's pariah economy is back on track.
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Translation: Juan Gabriel López Guix
