Russia’s state statistics agency RosStat and the Central Bank of Russia (CBR) have released a string of good economic results recently and improved their economic forecasts for this year. Of course Russia’s economy has been badly hurt by the extreme sanctions imposed by the West following the invasion of Ukraine, but the economy has done a lot better than expected. Maybe too much better?
Russia’s GDP was down 4.9% year on year in June, but that was a relatively mild contraction. The IMF has revised its outlook for this year to a 6% contraction, down from the 8% it previously forecast. That tallies with the CBR’s recent macroeconomic survey of professional economists that also revised their forecast down to a 6% contraction for this year. The CBR is even more bullish, now forecasting a 5% contraction (chart).
Drilling into the details of industrial production and this picture is more nuanced as several sectors – automotive first among them – have been crushed by the sanctions, but overall the picture remains relatively positive, with industrial production falling less than expected. The same is true with the June producers' PMI index result, which is also back in the black (chart).
However, how reliable are these numbers? Russia has been hit with the most extreme sanctions ever imposed. It has had half of its hard currency reserves seized – some $300bn. Its oil exports were drastically curbed when international traders refused to buy Russian oil for months as they self-sanctioned. A swathe of crucial imports that are used in nearly every branch of the economy simply stopped arriving and over 1,000 multinational firms that generate billions of dollars in sales have shuttered their shops and left the market for good. And all this has caused a shock on a par with the relativly mild setback Russia suffered in 2015, when oil prices tanked, and not a meltdown worse than the default and collapse of the banking sector in 1998 or the global meltdown in 2008.
Russia is hurting more than it shows
It is easy to think that the Kremlin has ordered the numbers to be massaged to suit the propaganda purpose of reassuring the public its anti-sanction measures are working. The fact that the government has simply stopped reporting a lot of key data since the start of the war has raised suspicions that the Kremlin is portraying itself in the best light possible as part of this effort to drum up support for the war.
The Yale Chief Executive Leadership Institute (Yale CELI) released a detailed report in July that is a comprehensive attempt to see how badly the economy has been affected by not only looking at the official numbers, but also cross-checking them with non-standard statistics.
“Our team of experts, using Russian language and unconventional data sources including high frequency consumer data, cross-channel checks, releases from Russia’s international trade partners, and data mining of complex shipping data, have released one of the first comprehensive economic analyses measuring Russian current economic activity five months into the invasion, and assessing Russia’s economic outlook,” Jeffrey Sonnenfeld, the founder and president of Yale CELI, said in the introduction to the widely cited paper. Yale CELI has also been responsible for putting together a list of foreign companies operating in Russia and reporting on who has left and who has stayed.
“From our analysis, it becomes clear: business retreats and sanctions are crippling the Russian economy, in the short term and the long term,” Sonnenfeld concludes.
The main conclusions of the study find:
“Defeatist headlines arguing that Russia’s economy has bounced back are simply not factual – the facts are that, by any metric and on any level, [that] the Russian economy is reeling, and now is not the time to step on the brakes,” Sonnenfeld says.
There were a lot of problems with the report, as bne IntelliNews reported in an in-depth review of its data, but the basic premise that Russian President Vladimir Putin has ruined Russia’s investment case and doomed the country to long-term stagnation is sound.
The government has been accused of cheating before, when it changed the methodology used to calculate its statistics several times. For example, RosStat significantly revised the 2018 GDP growth results to a six-year high from 1.6% to 2.3% as Russia emerged from a “silent crisis” caused by the collapse of oil prices in 2014 that raised eyebrows at the time.
The changes were part of the detailed reporting on the make-up of growth in the previous year that RosStat releases every year in January, and are supposed to reflect most accurate estimates. The agency always releases preliminary results around the end of the year, but they are usually revised after the full breakdown for all sectors of the economy are calculated. However, this time the revisions were unusually large.
Rosstat caused another scandal when it revised the results again to improve the 2020 GDP results to show a milder 3% contraction as Russia came out of the 2014 induced recession.
Manipulating data smacks of the GosStat era, the Soviet-era statistics organ that was a key part of the five-year plans as it set and then measured the targets in the plan. The centrally planned economic system partly failed as managers simply lied to GosStat if they missed their targets.
RosStat explained the changes in methodology by saying it was bringing its practices more in line with those used by the likes of International Monetary Fund (IMF) in an effort to make Russia’s statistics more directly comparable to those of other leading economies.
Despite these concerns, analyst say that on the whole RosStat’s statics are believable. One of the things preventing blatant cheating is there are so many official estimates. RosStat is the official statistics organ, but the CBR, finance ministry and the economics ministry bring out their own estimates. In addition to these official numbers, there are dozens of independent economists that have their own assessments and check the official numbers by cross-referencing things like industrial production with power consumption, as reported by the individual, and the mostly listed power utilities that are therefore obliged to report results.
This set up makes it much more difficult to cheat. Indeed, the CBR surveys the results of 20 independent economists in its own macroeconomic survey every month and lists its own forecast against what the independent economists are saying. In addition, Russia's official results usually tally closely with those of the international financial institutions: the IMF recently improved its growth forecast for this year from -8% to -6%, whereas the CBR improved its own forecast at about the same time from -8% to -5%, but published this in its survey, where professional economists also forecast a 6% contraction.
One of the main reasons that the analysts at Yale are suspicious is that the Russian government has simply stopped reporting a lot of key data since February because “it might be used to impose more sanctions”.
Among the statistics that have not been reported in five months are: foreign trade, details of budget spending, oil and gas production results, major state-owned company results and the banking sector profit, as well as details on deposits and loans. This makes it harder to fully assess the impact of sanctions.
And some of the numbers have been so good that it has led many to claim that the sanctions are not working. Russia is currently running the biggest current account on record. In the five months of the war Russia has recorded a surplus of $136bn, which is already more than it took in during the whole of last year, which was also a record.
The West has targeted Russian oil exports, but thanks to significant leakage – India and China have bought up all the oil that previously was sent to Europe – Russia is actually earning more from the sanctions than it does in normal times. But the Kremlin is also cherry-picking from amongst the statistics, says Sonnenfeld, promoting those that put it in the best light.
“Even those favourable statistics which are released are questionable if not downright dubious when measured against cross-channel checks, verification against alternative benchmarks and given the political pressure the Kremlin has exerted to corrupt statistical integrity,” says Sonnenfeld. “Concerns over meddlesome political interference must be given even more weight now that Putin appointed Sergei Galkin, the former Deputy Economic Minister and the most blatantly political pick in recent history, as head of RosStat in May.”
The jury remains out on what the true picture is, but as much of Yale’s own report relies on the official statistics to make its points and as many of those statistics, even the ones cited by Yale, paint a picture of milder pain than the headline proclaims, on balance it appears Russia’s economy is doing much better than expected… for now.
There is no denying that commodity prices have been supercharged by the war and that this is to Russia’s benefit. There is also no denying that the efforts to stymie Russia’s oil exports have largely failed, so Russia is earning outsized revenues, even if its ability to spend that money is curbed. But as the conflict wears on and prices return to earth then the technology sanctions in particular, which have been almost 100% successful, will start to bite and the real pain of sanctions will begin to tell, dooming Russia’s economy to stagnation. The question then becomes not how much the Russian economy is suffering but when will this suffering kick in in earnest?