How the Russian economy withstood the brunt of Putin’s war – 02/18/2023 – Vinicius Torres Freire

Almost a year ago, Russia invaded Ukraine. In April last year, banks, the IMF and economists consulted by the Bank of Russia (their central bank) estimated that the economy would shrink by 9% in 2022 because of the war. It was not so.

The 2022 GDP should have decreased by 2.1%, estimated in February by the Economic Expert Group, a consultancy that provides services to the Ministry of Finance. In the forecast compiled by the Russian central bank, the GDP would fall by 1.5% in 2023. It would be a biennium with an ugly fall: 3.6%. In the Great Recession in Brazil (2015-2016), the decline was 6.7%.

Panic, uncertainty, trade sanctions and the financial isolation imposed by the “West” were not enough to produce a disaster of the predicted size. Oil and gas exports account for most of Russia’s economic resilience, but not all of it.

Of the total government revenue last year, 44% came from oil and gas revenue (taxes and other income). In the years of very expensive oil from 2012 to 2014, this contribution reached more than 51%. In the low price of the epidemic, the 29%.

In 2022, total collection increased by 16% (in nominal terms). All the increase came from money from oil and gas.

The almost global energy crisis that had been going on since the end of 2021 worsened with the rise in prices caused by Putin’s war. Such high prices even compensated for the fact that Russian oil began to be sold at a huge discount.

A barrel of the Urals grade cost about $2 (R$10) less than the Brent grade just before the war. This February, the discount was US$ 32 (R$ 166) and it should stay there. Russia’s cash cow should yield less from now on.

The risk of negotiating the Urals brings down its price, the Europeans are managing to drop dependence on Russian energy and will accelerate decarbonization. The infrastructure to get oil to Asian allies is expensive. India, China and Turkey are unlikely to absorb the possible excess, say experts.

What’s more, the winter has been mild, and the Europeans have managed to stock up on gas. The rich world is on the brink of recession, which has brought down commodity prices in general (oil is now cheaper than before the war).

However, even with falling commodity prices and the Urals sold at a discount, Russia’s total exports of goods and services rose from US$ 550 billion (R$ 2.8 trillion) in 2021 to US$ 628 billion (R$ 3.2 trillion) in 2022. Imports fell, from US$ 379 billion (R$ 1.9 trillion) to US$ 346 billion (R$ 1.7 trillion).

The balance of these external accounts increased, of course. But, very important, imports fell little. Sanctions may have prevented the purchase of more advanced technology machines, parts and pieces. But for now they don’t seem to have amputated Russia’s ability to supply consumers and businesses. Even with the recession, industry stagnated, a case of glass half full and empty: the fall in the production of “civilian” goods was offset by the production of war equipment.

Vladimir Putin, let’s say with irony, is an Orthodox. His government has a surplus (pays current expenses and the interest account). The Bank of Russia is independent, at least in law. Since 2013, it has been presided over by Elvira Nabiullina, a somewhat legendary figure in world finance and considered one of the leaders of the “modernizing wing” of the Putinist elite (on the other side, there are the KGB types, militiamen, conspiratorial Rasputins and oligarchs).

Inflation in 2022 was 11.9%, compared to 8.4% in 2021. Their basic interest rate was 9.5% at the beginning of 2022, it went to 20% as soon as the war broke out, in order to contain the panic, and is at 7.5%, for an inflation projection of 6% in 2023 (actual rate lower than 1.5%, therefore). By the way, the Russian central bank’s inflation target is 4%.

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