- At Fitch Solutions, we maintain our view that the Russian economy to contract by 12.5% y-o-y in 2022 due to the extremely negative impact of Western sanctions over the invasion of Ukraine.
- However, we have adjusted our 2023 growth outlook down from 2.5% to -1.0% due to the expectation that hydrocarbon exports will be considerably lower than in 2022.
- We also expect a larger rebound in imports than previously forecast in 2023. This will not be driven by stronger domestic demand. Rather, the revision reflects the expectation of greater than anticipated progress with parallel import strategies.
The flash estimate of Russia’s Q122 came in at 3.5% y-o-y and -2.0% q-o-q, slightly above our expectations of 3.0% y-o-y and -2.5% q-o-q. By contrast, the data came in above Bloomberg consensus estimates of 3.7% y-o-y and -1.8% q-o-q. Our full year forecasts are also more bearish than consensus, which foresees a 10.3% contraction in 2022, compared to our forecast of 12.5%. A full-breakdown by component is unavailable but we expect to see a relatively robust consumption story, particularly as the initial shock of the invasion led to a short-term surge in domestic demand as households stocked up on everyday goods. For example, retail sales increased by 5.8% m-o-m in March 2022 amid a spate of panic buying induced by the imminent departure of many western brands and products from the market. Strong retail sales corresponded with a 7.6% m-o-m spike in inflation. However, week-on-week inflation data shows a considerable deceleration in price pressure through April, May and into June suggesting that demand is starting to weaken already (see chart below).
Inflation Has Peaked, Falling Demand To Hasten Disinflation
Russia - CPI, %
Looking ahead, we expect the economy to weaken further, entering a technical recession in Q222 (defined by two consecutive q-o-q contractions in output, see chart below). The impact of sanctions will be increasingly felt through the year as demand for Russian oil declines and stockpiles of western goods and parts are run-down, leading to severe shortages in the economy. Rosstat will release the breakdown by component between July 1-4, which will provide greater details as to the underlying drivers of the Q122 results.
Economic Activity To Deteriorate Over Quarters Ahead
Russia - Real GDP Growth, %
A sharp fall in private consumption will be the main driver of Russia’s recession in 2022. We forecast a steep 15.0% y-o-y decline in private consumption in 2022, coming after above-trend growth of 9.5% in 2021 (average 2000-2019: 5.6%). In our view, domestic demand will be limited both by the inability to access many products as a result of sanctions and also as a result of falling real incomes. Indeed, Central Bank of Russia (CBR) data shows that applications for ‘pay day’ style loans 1.0% m-o-m and 2.5% y-o-y in May and now account for 10.0% of retail loans compared to 6.0% in May 2021. The value of payday loans also increased, rising 16.0% y-o-y in May to RUB21.6bn. At the same time, sales of big-ticket items like cars have plummeted, suggesting that higher demand for short-term credit may be more indicative of households struggling to make ends meet (see chart below).
Demand For Big Ticket Items Nosedives, Will Remain Weak
Russia - New Car Sales, % y-o-y
Government consumption will increase in 2022 as the state looks to prevent a steeper decline in growth. Government consumption will be one of the only components of GDP to make a positive contribution to headline growth in 2022, adding 0.6pp (see chart below). Since the invasion, the state has announced plans to spend up to USD67.8bn in social relief, compared to USD42bn spent on coronavirus support in 2020 and 2021.
The other component of GDP that will add support to headline growth is net exports in 2022. We expect imports to collapse at a faster pace that exports in 2022 owing to G7 nations’ goods and technology embargos on Russia and deteriorating domestic demand. The larger decline in imports than exports will create a trade surplus in 2022 which will prevent a larger fall in Russian growth.
Net Exports Will Support Growth In 2022, But Drag In 2023
Russia - Real GDP, RUB trn 2016 prices (2015-2025)
In 2023, we expect to see some recovery in import growth as parallel import strategies become more effective. This will turn Russia’s net exports balance negative (see chart above). As companies’ run out of stockpiles of western-derived component parts, we expect Russia’s exports to decline in 2023 as industrial production and manufacturing decelerates. Another factor limiting exports in 2023 will be the reorientation of the industrial sector toward the domestic market to meet goods shortages. The CBR’s governor Elvira Nabiullina has urged manufacturers to reduce the goods they export in favour of trying to create goods needed at home, stressing that this will be very important to the economy’s recovery and its adaption to sanctions.
As a result of our more bearish trade outlook for 2023, we now forecast Russia’s economy to suffer another year of contraction in 2023. Previously, we forecast 2.5% real GDP growth in Russia in 2023. Now, we forecast the Russian economy to shrink by another 1.0% in 2023, before rebounding by 5.0% in 2023. Our 2023 forecast change was also informed by the EU’s sixth sanctions package which cuts 90.0% of Russian crude imports from start-2023 onward. We do not think that crude exports to India or China will be sufficient to replace these lost volumes because crude exports for Europe have accounted for around 50% of Russia’s total oil exports. It should be noted that our current forecasts are predicated on the assumption that Russia will continue to supply natural gas to Europe.
At the same time, we believe that faster-than-expected disinflation points to very weak domestic demand. We will be watching savings rate data for signs that Russian households are running down their reserves to compensate for stagnating real wages. Depleted savings will limit spending in 2023.
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