The Russian economy appears to be more robust than estimated at the start of the Ukraine war. But the outlook is far from rosy.

Russian gas exports have already fallen sharply, but the oil industry has yet to be affected. The Russian economy is contracting this year and the next, but less sharply than previously estimated. On balance, income from oil and gas exports has increased considerably, which is filling the state treasury. The European oil boycott will put pressure on revenues, while other sanctions will also hurt more.

Russian economy

Is Europe sinking as Russia climbs out of the trough? A Russian journalist recently asked this question during a press conference of the International Monetary Fund. Wishful thinking, the IMF economists clearly hinted in their response. They expect a contraction of -3.4% for this year, -2.3% for next year, while the eurozone is expected to grow slightly in 2023. However, last April, a contraction of more than 8% was expected for 2022.

Energy exports

Where does this relative windfall come from? Earlier analysis of the Russian economy still assumed a financial crisis. This scenario did not materialize because capital movements were restricted. Russian monetary authorities also prevented a bank run by raising interest rates. Friend and foe praise the attitude of the Bank of Russia, which operates independently and paints a fairly realistic picture of the economy. In a recent publication, the central bank stated that the economic recovery stalled in September, while inflation is rising again — partly due to ‘the exodus of suppliers and retail chains from unfriendly countries’.

Higher returns from energy exports keep Russia going. It is true that Moscow has largely turned off the gas tap to Europe of its own accord (exports are 80% lower than a year ago), but the sale of gas before the war ‘only’ accounted for a quarter of oil revenues. Oil is therefore much more important to the Russian economy. The price per barrel is higher this year than in 2021 (the recently announced production cut by the oil cartel Opec sets a new floor), while the export volume has remained stable. The state is likely to receive RR 11,700 billion (€194 billion) from oil and gas sales this year, an analyst estimates, compared to RR 9,100 billion last year (€151 billion).

The big blow

Western sanctions are potentially disastrous for Russian industry, which relies heavily on imports of machinery and technology. So far, Moscow has succeeded in limiting the effects with a bit of trickery and wizardry. As soon as the stocks run out, it is expected that major problems will arise. In the meantime, the combination of robust energy exports, falling imports and strict monetary policy is resulting in a strong ruble. This also dampens inflation, as imported consumer goods are relatively cheap as a result.

Normally, the strength of the currency says something about the strength of the underlying economy. But in the case of Russia, this is misleading. Analysts still expect the war to cost the country 10% to 15% of GDP, although this bill is spread over several years. The biggest blow will be the European boycott of Russian oil, which will take effect in December.

Emigration wave

This impending intervention has already led to shifts in trade flows: less to Europe, more to Asia. But can the entire decline of exports to Europe (accounting for about half of Russia’s oil exports before the war) be absorbed by, for example, China? It would then have to import more than twice as much Russian oil. Given the limited supply of tankers, this is only possible if new pipelines are built — and that costs time and money. Bofit, the think tank of the Finnish central bank, foresees an ‘exceptionally large drop’ in Russian exports before 2023. Finnish economists expect a 4% contraction for the Russian economy this year and next, making them more pessimistic than the IMF.

Oil and gas sales account for 40% of Russian government revenue. Lower exports will push up the budget deficit. In view of the low, largely domestically financed government debt, this is not an acute problem.

The decline of the Russian economy is happening in slow motion. This not only concerns the effects of the sanctions, but also of the wave of emigration as a result of the mobilization. Demographers expect a declining birth rate, accelerating the population decline that started in 2018. Bloomberg economists now estimate Russia’s potential economic growth at 0.5% annually — up from 2.5% before the war.