Russian Economy Grows by 5% in October

Figure 1: Industrial Production (%, YoY), October 2020 – October 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 in 2023. The Russian economy grew by a strong 5% YoY in October .

It seems industrial production remains the driving force behind the growth. Despite cloudy macroeconomic outlook based upon hiking inflation and inflationary pressures; increased war related defense spending and strong consumer demand continue to boost industrial production amid greater outlays on social support and higher wages. (here).

According to Russia's statistics service Rosstat, the industrial production surged by 3.5% in January - October 2023 in annual terms, and gained 3.5% in October on an annualized basis. In addition, industrial production had an uptick by 4.9% in October against September 2023. Rosstat reported that electricity, gas and steam supply added 1.3% annually in October (plus 0.2% in January - October).

It appears another accelerator for the GDP growth in October was the accelerated steel production. World Steel Association (WSA) recently announced that steel production in Russia accelerated by 9.5% YoY in October 2023, and increased by 5.3% annually to 63.5 million metric tons in January-October 2023.

Thanks to these developments, Russian officials remain optimistic about the 2023 GDP growth figures. Finance Minister Anton Siluanov recently underscored that GDP growth may exceed 3% in 2023. Russia's Economic Development Ministry also upgraded its GDP growth outlook underlining that the economy is backed by mounting consumer activity triggered by flexibility of the domestic labor market and growth of real money income of households.

Despite optimistic views, Russian economy continues to struggle due to elevated inflationary expectations, weakening trade income, and volatile Ruble (RUB). The fall in foreign trade income remains as a substantial restriction to the economic growth. According to the Federal Customs Service, 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 mentioned time frame, Russian exports decreased to $316.9 billion from $448.9 billion, while imports increased to $213.3 billion from $180.3 billion. Economic and financial sanctions imposed on Russia continue leading to a steady weakness in energy sales revenues, coupled with growing imports, which jeopardize the GDP expansion in the remainder of 2023 and 2024. (Note: We think 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.)

Within this framework, our forecast for Russian GDP growth is 1.7% in 2023 and 1.3% for 2024, lower than expectations, partly because of spiking inflation, sanctions, and weakening RUB. It is worth mentioning that Central Bank of Russia (CBR) continues its key rate hiking cycle (Note: Current rate is 15% after 200 bps increase on October 27.) citing inflationary pressures remaining high and strong demand and lending. Taking into account that CBR's active tightening actions, we predict this can suppress demand and imports and squeeze lending in the upcoming quarters, and cause GDP to partly be suppressed, but with lagged effects.

Another factor to consider is the upcoming 2024 presidential elections as the country will choose its next president in March. We forecast election related populist social spending will increase putting further fiscal pressure on already struggling government budget, but can also support growth partly in Q4 2023 and Q1 2024.