Russia GDP (RUB bn)

GDP contracts at a softer pace than expected in 2022

GDP contracts at a softer pace than expected in 2022

According to a preliminary estimate, GDP contracted 2.1% year on year in 2022 (2021: +5.6%). The result surprised most market analysts on the upside. The economy performed markedly better than expected in the face of international sanctions and direct war-related costs last year, chiefly thanks to high prices for its energy exports and strict capital controls implemented early in 2022. Notably, new legislation in Russia allows the government to suspend the publication of official statistics, which raises issues concerning data reliability going forward.

National accounts data released by Rosstat did not include quarterly data and provided only a partial breakdown by expenditure for annual data. According to the release, private spending contracted 1.8% year on year in 2022, contrasting a 10.0% expansion in 2021. Moreover, investment activity growth decelerated to 5.2% this year from 9.1% in 2021. Meanwhile, public spending growth cooled marginally, coming in at 2.8% in 2022, from 2.9% in the previous year, likely boosted by military spending. The downturn in domestic demand was driven by international sanctions, partial mobilization and a capital exodus from the country in the wake of Russia’s invasion of Ukraine. While external sector data was not released, high energy prices should have supported exports throughout the year.

According to a preliminary estimate, GDP contracted 2.1% year on year in 2022 (2021: +5.6%). The result surprised most market analysts on the upside. The economy performed markedly better than expected in the face of international sanctions and direct war-related costs last year, chiefly thanks to high prices for its energy exports and strict capital controls implemented early in 2022. Notably, new legislation in Russia allows the government to suspend the publication of official statistics, which raises issues concerning data reliability going forward.

National accounts data released by Rosstat did not include quarterly data and provided only a partial breakdown by expenditure for annual data. According to the release, private spending contracted 1.8% year on year in 2022, contrasting a 10.0% expansion in 2021. Moreover, investment activity growth decelerated to 5.2% this year from 9.1% in 2021. Meanwhile, public spending growth cooled marginally, coming in at 2.8% in 2022, from 2.9% in the previous year, likely boosted by military spending. The downturn in domestic demand was driven by international sanctions, partial mobilization and a capital exodus from the country in the wake of Russia’s invasion of Ukraine. While external sector data was not released, high energy prices should have supported exports throughout the year.

The economy is expected to remain in recession this year due to enduring international sanctions including Western countries’ bans on Russian energy imports, likely new waves of mobilization and Russia’s continued isolation from global markets. Shrinking revenues from energy imports will dent government revenues, limiting its ability to stimulate the economy, and potentially restraining the Central Bank from cutting the interest rate.

Further ahead, the Russia-Ukraine war is a key factor to watch. A potential long-term conflict would harm the economy’s growth potential further.

Commenting on the outlook, analysts at Scope Ratings said:

“Russia’s economy faces a second consecutive year of recession in 2023, likely to be significantly more severe than the 0.8% contraction assumed in the government’s latest budget which is based on an optimistic average oil price of USD 70 a barrel.”

Analysts at Unicredit added:

“We expect the Russian economy to contract by around 5% in 2023, with foreign demand dragging more on economic activity than domestic demand. Private consumption might fall amid tighter financial conditions, while real wages are expected to stagnate due to lower inflation. Disinflation is likely to continue amid weak consumer demand, being slowed by potential RUB depreciation.”

The economy is expected to remain in recession this year due to enduring international sanctions including Western countries’ bans on Russian energy imports, likely new waves of mobilization and Russia’s continued isolation from global markets. Shrinking revenues from energy imports will dent government revenues, limiting its ability to stimulate the economy, and potentially restraining the Central Bank from cutting the interest rate.

Further ahead, the Russia-Ukraine war is a key factor to watch. A potential long-term conflict would harm the economy’s growth potential further.

Commenting on the outlook, analysts at Scope Ratings said:

“Russia’s economy faces a second consecutive year of recession in 2023, likely to be significantly more severe than the 0.8% contraction assumed in the government’s latest budget which is based on an optimistic average oil price of USD 70 a barrel.”

Analysts at Unicredit added:

“We expect the Russian economy to contract by around 5% in 2023, with foreign demand dragging more on economic activity than domestic demand. Private consumption might fall amid tighter financial conditions, while real wages are expected to stagnate due to lower inflation. Disinflation is likely to continue amid weak consumer demand, being slowed by potential RUB depreciation.”