Russian macro: in search of integrity

RUSSIA ECONOMICS - Report 29 Mar 2022 by Evgeny Gavrilenkov and Alexander Kudrin

Having experienced a shock, a month after the start of the military operation some Russian producers and ministries began talking about inevitable changes to their business plans. Even when things go in line with the plans made at the very top level, making one's own plans becomes increasingly complicated as the exact details and the time frame of the supreme plan remain unknown. On top of that, some new initiatives, such as switching to receiving payments in rubles for the gas exported to wrong (i.e., "unfriendly") countries can only increase the uncertainty. Whether such a shift will be generally tolerated or not remains unclear. So far, the G7 and the EU have rejected it. From the Russian perspective, the idea to trade gas in rubles with unfriendly countries appears reasonable given that, with imports to Russia from those countries being cut, Russia no longer needs that much foreign cash, especially as it can be easily confiscated.

The scattered information that is currently available suggests that Russia's GDP is likely to post a deep contraction in 2Q22 as the country’s Minister of Industry recently mentioned that it could take from three to six months for companies to sort things out and come up with revised business plans, including finding new customers and suppliers outside the circle of “unfriendly” countries. Meanwhile, it may take even longer as “friendly” and "indifferent” countries may be quite cautious when dealing with Russia. Looking at the end-use side of GDP, shrinking exports along with imports and household consumption may cause the economy to contract by over 10% this year, which would be much deeper than in 2015. At that time Russia was also affected by sanctions, albeit less severe, while the oil price fell.

In 2022, the country’s nominal GDP is likely to be close to the 2021 level, i.e., around R130 trln, as high inflation is expected to somehow counterbalance economic contraction in real terms. As the ruble is set to weaken on an average annual basis, Russia’s dollar-denominated GDP is likely to contract by around 17-23% from the $1.77 trln seen in 2021.

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