Russia Country Report Nov22 - November, 2022

November 2, 2022

Economic activity stabilised in Russia in Q3 after the deep downturn in
Q2. Car sales have bottomed out, manufacturing has bounced back and bank
credit has started to flow again.

Analysts think GDP is likely to have stagnated or contracted slightly q/q in Q3.
But there remain major weak spots. Car output is some 80% below its level at
the start of the year, retail sales are barely growing, and metal mining is

The coming months are likely to remain challenging. The announcement
by the government that it will mobilise reservists in September has caused a
large fall in labour supply that will hit domestic demand. The inflation outlook
has become less favourable too.

Although the headline inflation rate fell from 14.5% y/y in August to
13.7% y/y in September, m/m dynamics suggest that prices pressures have
picked back up. This is likely to prompt the central bank to bring a halt to its
easing cycle at one of its next few meetings.

What’s more, Russia has passed “peak current account surplus” and
tighter sanctions on the energy sector will soon come into force. EU imports of
crude oil and petroleum products from Russia have held up well in recent
months but are likely to fall more sharply in Q1 2023 when the EU oil embargo
takes effect. Taken together with the G7 oil price cap, analysts expect Russian
oil production to fall by 1m bpd (or 10%) next year and for GDP to contract by
2.5% over 2023 as a whole.

But Russia’s trade is holding up surprising well given the extremity of
the sanctions. The value of Russian exports to EU countries was about 20%
lower in August than in the months before the war. In contrast, the value of
exports to China was approximately 50% higher in August-September, and the
value of exports to India was as much as 5-6 times higher than the pre-war

Russia's goods imports fell sharply in the spring after the Russian invasion, but
have since recovered somewhat. In August, the value of imports was
approximately 30% lower than in the months before the war, based on the
statistics of trading partner countries.

Sanctions have crippled Russia’s economy, but as time passes it is finding new
routes and customers. Imports from Turkey have soared to multiples of
volumes in previous years and over all imports volumes by value have
recovered 90% of their losses, but are running at about half of exports, leaving

6 RUSSIA Country Report November 2022

Russia with a healthy balance of payments surplus. The current account
contracted in the third quarter, but remains at record levels compared to
pre-war at $153bn in the third quarter.
There has been a growing realisation in Europe that the Ukraine war
induced crisis is going to get a lot worse before it gets better. Russia’s
ability to muck about with commodity price and supplies is having a
devastating short-term effect on Europe economy, but Russian President
Vladimir Putin’s fiscal fortress is proving to be a lot more robust than had been
The Central Bank of Russia (CBR) monthly macroeconomic forecast for
October brough more positive news with a consensus contraction forecast of
only 3.5%, way better than the 15% guesses at the start of this year.
Rosstat reported that a wide range of industries continued to show reversal in
their downward trend or at least, some pause in their declining pattern in
August. In fact, manufacturing increased c0.7% m/m in August, with
construction surprising with a further 1% m/m s/a growth, while transportation
also indicated a moderate recovery at 0.1% m/m s/a.
All these trends pointed to a moderation in economic contraction – according
to the Economy Ministry, the Russian business activity showed 4.1% y/y
contraction in August v 4.3% in the previous month.
Russia’s economy has been irreparably damaged by the sanctions
regime, but that pain will only kick in in a few year’s time. In the meantime the
expanding polycrisis is hurting the rest of Europe’s economies which are falling
into deep recession as well as costing north of half a trillion euros in relief and
aid so far – a number that will certainly double or more in the next year.
Life has remained fairly normal in Russia until now, but things changed
with Putin’s decision to mobilise in September. There is a creeping
realisation that the forecast rebound in consumption activity this autumn will
not appear. That will take a large chunk out of expected federal tax revenues
next year and 40% of Russia's GDP is now located in regions operating under
creeping martial law, mostly concentrated in the populous European part of
The Audit Chamber says budget revenues as a share of GDP are
expected to fall from 19% for 2022 to 16.3% in 2025 at a time when
spending has increased so much that the break-even barrel of oil price has
increased from around $42 to an estimated $96 now – slightly more than the
current market price, and that is not taking into account the fact that Russia is
offering a circa $20 discount on the oil it sells to its partners as the cost of
sanctions on the oil business. But with so little debt and the financial system
under lockdown, the CBR can print its way out trouble for the foreseeable

7 RUSSIA Country Report November 2022

future if needs be.
The mobilisation has far reaching political consequences as an estimated
one million Russians have fled the country, including around one in four IT
professionals that will also have long-term consequences on Russia’s
development. At the same time, at the start of mobilisation, Defence Minister
Sergei Shoigu said that conscription would be limited to 300,000 men, but
more recent reports estimate that as many as onemn have been called up.
Economists are worried about what this will do to labour markets and
productivity, as the economy was already hobbled by sanctions. But one side
effect is that unemployment remains at record post-Soviet lows.
Conscription has stabilised the front line and Ukraine’s counter offensive
has slowed leaving most of the Donbas in Russia’s hands. On October 10 the
Kremlin launched its own counteroffensive that boils down to destroying
Ukraine’s power infrastructure just head of winter. Ukraine’s air defence have
vastly improved but with a flock of 1,700 Iranian Shahed 136 “kamikaze”
drones at its disposal enough at getting through to cause devastating damage
– and even more powerful Iranian ballistic missiles area expected to arrive
soon. Russian President Vladimir Putin has regained the initiative in the war,
which increasingly looks like it will drag on all winter and probably longer.
The Ministry of Finance (MinFin) has already put the economy on war
footing, making spending cuts and raising taxes. Putin added that by imposing
martial law in the annexed regions, but sneaked in similar powers to regional
governors in the European part of Russia in a move to bolster his grip on the
The next dramatic event on the calendar will be the West’s attempt to
impose gas and oil price caps on Russia’s exports ahead of the
December 5 ban on buying Russian oil. There are a growing number of
reports that Russia has been putting together a large “shadow flotilla” of
tankers to dodge these sanctions which currently look like they will fail.

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