Russian macro: thriftier economic growth amid currency “detoxication”
The Russian economy continues to adapt to the new environment, and this adaptation will help it grow this year – possibly at 2.5%, with some potential upside. Although this year’s growth outlook doesn’t look impressive after last year’s GDP contraction by 2.1%, it seems more or less comparable with the average annual growth seen in the pre-pandemic years. (In 2021, the economy grew at an exceptional rate of 5.6% in the aftermath of the 2020 pandemic shock, when GDP contracted by 2.7%.) What appears positive these days is the economy’s ongoing adaptation amid unstoppable efforts to ringfence the country and disconnect it from the rest of the world financially and economically. As a result of these efforts, it looks as though the Russian economy has become less sensitive to external shocks and is developing a thriftier and simpler growth model, with less sophisticated regulations.
The Central Bank, for instance, recently announced that, starting August 10, it stopped mirroring the operations of the Finance Ministry on the FX market stipulated by the fiscal rule. This means fewer distortions on the FX market and greater chances for the ruble to find its new equilibrium area. So far, the weakening of the ruble has created few problems for the economy apart from some acceleration of inflation. As Russia’s foreign debt decreased to $347.7 bln by mid-2023 (down 8.7% since January 1), and some of this debt is denominated in rubles, pressure on the economy to secure foreign debt servicing and repayments has decreased. Hence Russia’s shrinking current account does not seem to be a big problem. As the budget deficit is expected to be relatively low and easily financeable, while the current account surplus will narrow to levels seen previously, there will be a more efficient and thriftier economic growth, i.e., smaller capital outflow and a less significant crowding-out effect on the domestic money markets as the government's borrowing needs will remain limited.
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