Russian macro: shocks and pressure
The initial shock associated with Russia’s “special military operation” has evolved into a kind of permanent pressure on the Russian economy due to the restrictive measures imposed by Western governments and the voluntary exodus of many foreign companies that operated in the country. Even though some companies decided to stay, it is not guaranteed that they won’t change their mind. As the split between Russia and the West is irreversible, the Russian economy has entered a period of unusual transition toward greater self-sufficiency, and it is yet unclear how long this transition may last and what kind of economy might eventually emerge. What is very clear at this stage is that Russia will no longer rely on any future hypothetical partnership with the West in key sectors of the economy, such as many segments of manufacturing, transport, finance, and others.
Russia’s GDP trends in 2022 and 2023 will look quite different from how they were seen earlier this year. At that time a short-lived but deep fall in economic activity was expected in 2Q22, followed by a relatively fast rebound, i.e., similar to what happened in 2020 and 2021. As a result of that fast rebound, the Russian economy grew by 4.7% in 2021 and emerged from the recession with a more or less the same structure. It looks as though the recession is likely to last longer these days, but the GDP contraction in 2022 won’t be as significant as was thought three months ago, and the recession may expand into 2023, as well. The likely outcome will be the emergence of an adjusted structure of the economy so that several sectors, such as finance and mining, which benefited in the past, will lag behind. To support the reorientation of the trade flows from the West, the Russian government may once again try to announce an increase in investment in the infrastructure needed to redirect supply chains toward Asia. As inflation decelerates while lending rates remain high, the CBR will continue cutting the key rate and may move it closer to mid-single-digit levels later this year.
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