Russian macro: Economy growing on a stable external balance and currency “detoxification”
As inflation accelerated and the CBR raised its key rate by 100 bps to 16%, Rosstat published 3Q23 statistics on the production side of GDP that confirmed that the Russian economy expanded by 5.5% y-o-y that quarter. The agency also mentioned that the national economy grew by 3.0% in 9M23. As October statistics also looked decent, some additional points emerged to support the view that the GDP growth may visibly exceed 3.0% this year. This growth, however, is accompanied by accelerating inflation that could exceed 7.5% this year. Rising prices inflate the nominal GDP and the tax base, which will help collect more taxes next year.
One can see from all sorts of available statistics that the Russian economy is becoming less dependent on the West, as not only the government but also Russian businesses are now actively engaged in this decoupling. For the latter, it means new investment in logistics oriented toward Asia and, to some extent, Africa. The aforementioned increase in public spending helped boost infrastructure investment. Investment in production capacity started to grow fast three years ago. Continuous growth of investment in production capacity has already helped somehow upgrade the latter and should have pushed up GDP growth potential to some degree. Due to the fact that Russian businesses now see the developed world as hostile territory, they have neither the opportunity nor the desire to invest there. Being hit by sanctions, companies and their owners have lost some of their assets but the main part of their businesses remains in Russia and is continuously generating cash flow. A larger portion of this is reinvested locally—it is a clear illustration of a structural change in the growth model that implies less capital outflow and more local reinvestment that lifts potential output. One cannot rule out that the Russian economy may grow faster in 2024 than in 2023 as a new growth model emerges. However, inflation is likely to stay elevated.
Recent developments illustrate that Russia has been quite adaptable in facing new challenges. The CBR’s business survey revealed that the business optimism index soared at the end of 2023 and hit a 10Y high, which explains why investment activity has grown in Russia. It looks as though investments will continue to grow fast in 2024 and support GDP growth, as well. However, stronger relations with the Asian economies, and China in particular, imply that Russia will become increasingly dependent on the economic situation in that part of the world
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