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In the two years since Vladimir Putin invaded Ukraine, the Russian economy has continually defied the prophets of doom. The monetary collapse, widely predicted for the spring of 2022, never happened. The economy fell into recession, but it was less severe than expected and it temporarily recovered. Inflation has been the biggest recent scare. Last year, prices accelerated rapidly; Economists think they could get out of control. Even Putin was worried. In February, he suggested the government pay “special attention” to emerging costs.
But once again, the Russian economy belies the pessimists. Data released on March 13 showed that costs rose 0. 7% month-on-month in February, up from 1. 1% at the end of last year. The annual inflation rate stabilized at around 7. 5% (see chart). Forecasters expect it to fall to just 4% before long; Households’ expectations for long-term inflation have flattened. Russia’s presidential election is scheduled to begin on March 15, at the time of writing. The result is a foregone conclusion. If he were competitive, those numbers wouldn’t hurt Putin.
Russian inflation rose last year due to a fiscal wave larger than the one implemented by the Covid-19 pandemic. As Putin intensified his invasion of Ukraine, he increased spending on everything from shipping gadgets and weapons to soldiers’ salaries. Total government spending increased by 8% in genuine terms. The demand for goods and facilities has outstripped the economy’s ability to supply them, leading merchants to increase their values. It has become especially difficult to locate workers, especially since thousands of people have been mobilized and tens of thousands of people have been mobilized. They have fled the country. In October last year, nominal wages were growing at an annual rate of 18%, up from 11% at the beginning of the year.
Who deserves credit for the change? The Finance Department makes its case. Last year, its officials effectively pushed for exchange rate controls, which require exporters to deposit foreign currency into Russia’s monetary system. This slowdown has likely supported the ruble, which has appreciated in recent months, reducing the value of imports.
Central bankers think that their peers in the Ministry of Finance are ignorant economists who manipulate markets at their peril. They believe their policy (of more than doubling interest rates since July 2023) deserves credit for slowing inflation, and they’re probably right. Interest rates have encouraged Russians to put their money into savings accounts instead of spending it. Tighter financial policy has also curbed lending. In December, private lending rose 0. 6% month-on-month, compared with 2% for the 2023 peak. .
Few central banks have been so hawkish. Still, it turns out that Russia is still headed for a “soft landing,” in which inflation would slow without crushing the economy. The functionality of the economy is now in line with its pre-invasion trend; GDP grew in genuine terms by more than 3% last year (see chart). Unemployment remains at an all-time low and there are few signs of misery on the part of businesses. In fact, the rate of business closures recently fell to its lowest point in 8 years. Meanwhile, the Moscow Stock Exchange expects to see more than 20 IPOs this year, up from nine last year. And the latest “real-time” insights into economic activity are pretty solid. Consensus forecasts for GDP expansion of 1. 7% this year Therefore, they seem too pessimistic.
Russia’s economic resilience is partly the result of measures that go beyond stimulus. In recent years, businesses and households have accumulated gigantic amounts of cash, allowing them to continue spending even in the face of peak inflation, and avoid default in the face of peak borrowing. As in other parts of the world, the decline in demand for labour has essentially resulted in a reduction in unfilled vacancies rather than a reduction in the number of people employed. Figures from HeadHunter, a recruitment site, suggest that the proportion of job postings for job seekers has stopped rising. Having struggled to locate staff in recent months, bosses are reluctant to fire them unless necessary.
The violation of sanctions has also boosted the economy. Russia’s once-Western-owned production facilities have reopened under new management, as the central bank notes in a recent report. At the start of the war, sanctions made it difficult for Russian corporations to source inputs, delaying production. But today, corporations have established sustainable supply chains with “friendly” countries. Far more of all goods imports come from China, twice as many as before the invasion.
As new industrial relationships have been established, Russian exporters have dared to raise their prices, supporting their revenues and profits. The reduction in oil that Russia offers to Chinese customers, for example, has fallen from more than 10% at the beginning of 2022 to around 5%. % today. And it’s not just about oil. Putin boasts of booming ice cream exports to China, noting last week that he “licked my friend, President Xi Jinping. “
As any Russian knows, you never really beat inflation. Central bankers remain concerned that inflation expectations remain too high. The biggest concern is that the ruble could simply depreciate, either due to falling oil prices, a new circular sanctions, or if China loses interest in supporting Mr. Putin – these are serious concerns. However, the pariah economy is back on track. ■
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