Russian Economy Expands by 5.5% in Q3, Rosstat Reports
Bottom Line: According to Rosstat's announcement on November 15, the Russian economy has grown by a strong 5.5% in Q3 when compared to the same quarter of the last year, thanks to increased defense spending to boost industrial production, continued consumer demand and lending coupled with higher pensions and salaries. We still foresee Russian GDP to grow by 1.7% in 2023 since recent strong monetary tightening is expected to suppress demand and squeeze lending, coupled with tight labor market conditions, elevated inflationary expectations, and weakening trade income, and volatile Ruble (RUB).
Figure 1: GDP Growth (%, YoY), Q3 2020 – Q3 2023
Source: Datastream, Continuum Economics
The Russian economy continues to grow fast in 2023 so far, after partly relieved from the negative impacts of the war in Ukraine. (Note: Russian GDP decreased by 1.8% in Q1 2023, and grew by 4.9% in Q2.) The main accelerator for GDP growth continues to be the surge in the military spending and strong manufacturing activities as the mechanical engineering, chemical and metallurgical sectors provided almost 90% of the expansion of manufacturing output in 2023, noted by prime minister Mishutin. Another contributor to the growth dynamics have been the strong consumer demand amid greater outlays on social support, and higher wages.
Russian officials remain optimistic about the 2023 GDP growth figures. Russian finance minister Anton Siluanov said early November that the Russia's economy is expected to grow by 2.8% in 2023, and added that "This is a good figure, better than August projections. This comes with growth of households' real earnings, growth of industry, manufacturing, growth of investments". Underlining strong manufacturing figures, economic development minister Maxim Reshetnikov underscored on October 31 that "The pace has been good recently, especially in comparison to the negative forecasts that were issued not long ago." According to the Central Bank of Russia's (CBR) base-case scenario, Russia's GDP growth rates would reach 2.2-2.7% this year. The European Commission has also upgraded its outlook on Russia's GDP dynamics for 2023, projecting a growth of 2%, instead of the previously expected contraction of 0.9%.
Despite positive estimates, it is worth to mention that the country continues to be strained by high inflation, decreasing trade income and volatile RUB. As mentioned correctly by the CBR's MPC release on October 27, the rising growth trend increases persistent inflationary pressure in the economy. "Current data for the third quarter show that economic activity is expanding faster than the CBR anticipated in September. In times of high domestic demand, the Russian economy's upward deviation from a balanced growth trajectory is increasing. This in turn increases persistent inflationary pressure in the economy," the statement said.
In addition, the signs coming from the foreign trade side to support GDP growth are not very promising, though. The Federal Customs Service recently announced that the positive balance of foreign trade of Russia decreased to $103.6 billion in January - September from $268.6 billion in the same period in 2022. In the same time period, Russian exports decreased to $316.9 billion from $448.9 billion, while imports increased to $213.3 billion from $180.3 billion. (Note: On the oil exports front, OPEC's report in November underlined that Russia became the largest supplier of crude oil to China and India again in September 2023, while Russia provided almost 19% of China's total oil imports as the country has been India's top oil supplier for a year, having ensured 36% of the country's total imports in September). Of course, the major constraint continues to be the sanctions on Russia's energy sales and slowing Chinese economy, which will likely lead to a steady plummet in export revenues. Coupled with growing imports, we think these will jeopardize GDP growth in the near future. We expect the oil price cap coupled with a possible low demand and low oil price can hurt Russian economy if the war continues and Western societies will not lift sanctions in 2024 and beyond (here).
Within this framework, our forecast for Russian GDP growth is 1.7% in 2023 and 1.3% for 2024, lower than expectations, as the Russian economy struggles with spiking inflation, sanctions, and weakening RUB. Other reasons threatening growth and likely lead to a partial slowdown are staff shortages, falling pattern in the utilization rates, and restrictions on Russia's energy sales leading to a steady plummet in export revenues, coupled with growing imports.