Russian macro: looking for a recession

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

According to recent estimates from the Economics Ministry, Russia's GDP contracted by 4.9% y-o-y in June. The contraction deepened after the 4.3% y-o-y decline in May and 2.8% in April. These are just the ministry’s estimates, but not the official SNA numbers to be published by Rosstat later (Rosstat compiles quarterly national account data only). According to the official statistics, Russia's GDP grew by 3.5% y-o-y in 1Q22. If we accept the estimates made by the Economics Ministry, then it appears that the country’s GDP was slightly down y-o-y in 1H22 as its y-o-y contraction in 2Q22 should have been around 4.0%, which is rather moderate given the magnitude of the economic shock Russia is experiencing amid the lasting “special military operation” in Ukraine.

The performance of various sectors of the economy has been volatile and uneven. The same occurred in June. For instance, car manufacturing nearly collapsed in May but showed some signs in June that it was not dead yet (it was down 89% y-o-y). At the same time, agricultural production was stable in 1H22, 2Q22 and in June, having grown by over 2% y-o-y. As manufacturing gradually gets squeezed, this affects freight transportation. Activity in this sector was down 5.8% in June but still up 0.5% in 1H22 (both numbers are y-o-y).

Our sensitivity analysis shows that Russia's GDP should contract in 3Q22 by around the same 4.0% y-o-y to avoid technical recession. In theory, this may be possible if the economy returns to its usual seasonally unadjusted Q-o-Q dynamics from 3Q22. Whether or not this actually happens depends on many factors that are hard to envisage. Simulations also show that if Russia's GDP contracts by 5.4-5.8% y-o-y in 3Q22 then it will decrease by around 3.5-3.7% in 2022 as a whole (assuming a gradual flow of new sanctions, but no new serious shocks in 4Q22). This contraction looks less significant than was anticipated a couple of months ago. Currently it looks as though the Russian economy is more adaptable than expected earlier, but how long it will take to refocus the country’s trade relations from the West to elsewhere (and where?) is not yet clear.

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