Russian macro: another year of shocks and uncertainty ahead
This year has been uneasy for the Russian economy, just like many other years in the past decade. The forthcoming years will be even more challenging as politics continue to dominate the economy – both in Russia and worldwide. The Russian economy will continue to undergo dramatic changes across the board – be it the country’s foreign trade, the sectoral structure of the economy, or finances. There are many striking examples of how this transformation has affected the markets and finance. The Moscow Exchange, for instance, reported that the turnover of trading in “friendly” currencies grew by a factor of 70 this year, and in November, the share of these currencies reached 34%, up from just 0.5% early in the year.
It looks as though most forecasters of the Russian economy are relying on wishful thinking, i.e., assuming no major escalation of the conflict between Russia and the West. These assumptions may not materialize as the current combination of the political leaders in various countries is such that escalation is the most likely scenario, but it is hard to predict which level it may attain. Hence, the wishful thinking, i.e., assuming factors' being equal in 2023, is the most reasonable assumption nowadays. Based on such an assumption, the Russian economy may avoid a recession in 2023. It may well be the case that Russia’s economic growth in 2023 (and possibly beyond) will be driven by investments in production capacity to be made by affluent companies interested in re-designing the structure of the Russian economy and its foreign trade, while private consumption will lag behind as consumers will have to adjust their spending patterns. Even though the ruble until recently was abnormally strong in 2Q22 and 3Q22, sales of consumer durables plunged. As the Western durable goods that Russians used to buy in the past are no longer available, it doesn’t mean these products may be fully replaced by imports from Asian countries, China in particular. The expected transformation of the Russian economy will require a much weaker ruble than in 2022. In 2022, the ruble was abnormally strong (on average around 68.3 vs USD), while the average oil price was lower than in 2021, when the ruble was weaker (73.7 vs USD). As of the end of 2022, the ruble has already started its journey to levels closer to equilibrium. In 2023 it should weaken further.
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