Russian GDP Grew by 2.1% in January-July 2023
![](https://adminmvp.continuumeconomics.com/storage/author/654a661065625.jpeg)
Bottom Line: The Russian economy expanded by 2.1% YoY in January-July 2023. (Note: The GDP growth recorded 4.9% YoY in Q2 2023, the first increase in a year after shrinking in the previous four quarters). The positive trend arose from increased defense spending continuing to boost industrial production, strong consumer demand amid greater outlays on social support, higher pensions and salaries. We 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 weak export revenues due to sanctions.
Figure 1: Central Government Deficit/Surplus (in Trillion Rubles), September 2020 - August 2023
Source: Datastream, Continuum Economics
The predictions for Russian GDP remain positive, despite the ongoing Ukraine war and macroeconomic problems. Underlining strong manufacturing figures, economic development minister Maxim Reshetnikov mentioned on September 25 that the share of manufacturing in GDP will rise by 0.2 percentage points this year and will reach 13.8% in 2023 -excluding oil refining and food industry- igniting GDP growth. Drawing an optimistic framework, minister Reshetnikov added that industry is growing fast, primarily due to manufacturing, construction has a high growth rate while investments grew by 7.6% in H1 of 2023. According to him, there is good dynamics in lending to businesses and individuals as he envisages GDP growth will be 2.8% for 2023, and 2.3% in 2024. In the similar vein, Russian Finance Minister Anton Siluanov recently said that the Russia's economy is expected to grow by 2.5% or more in 2023. Central Bank of Russia’s (CBR) full-year growth forecast to 1.5% to 2.5% for 2023 while the Bank noted that output in most sectors is focused on domestic demand and has reached or even exceeded pre-war levels.
Despite these positive predictions, 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 weakening Ruble (RUB) and spiking inflation, which stood at 5.2% in August. (Note: CPI recorded 4.3%, 3.25%, and 2.5% in July, June, and May, respectively). It is worth mentioning that CBR continues its key rate hike cycle citing inflationary pressures remaining high, strong demand and lending, and depreciation of RUB during summer months. (Note: In the last two MPC meetings, CBR raised the key rate first by 350 bps to 12% on August 15, and then 100 bps to 13% on September 15). Taking into account that CBR is actively aiming to cool off inflation via key rate hikes, we think this can suppress demand and imports and squeeze lending in the upcoming quarters, and cause GDP to fall, but with lagged effects.
It is important to underscore that CBR considers the recovery of economic growth is close to completion as the utilization rates of manufacturing capacities have reached peak levels, and unemployment levels hit the lowest figures as of July, signaling a partial slowdown is likely over the horizon due to staff shortages and a possible fall in the utilization rates in the remainder of the year. The CBR also admits the possibility of maintaining oil and gas revenues below the baseline for necessary income, even in the event of a moderate weakening of the RUB. In this regard, the only way to maintain the budget rule would be what the regulator called adjustment of taxation parameters in the oil and gas sector. In this regard, we consider that restrictions on Russia’s energy sales leading to a steady plummet in export revenues, coupled with growing imports, could jeopardize GDP expansion in the remainder of the year and in 2024. (Note: In August 2023, the government recorded a budget deficit of RUB 2.361 trillion, ninth month in a row with a deficit. Expenses surged by 11.8% to RUB 19.4 trillion mostly related to war spending, while revenues decreased by 3.5% to RUB 17 trillion, due to fall in Russia’s energy sales and slowing Chinese economy).
One accelerator for Russian growth has been the surge in the military spending after the war started. Interestingly Russian government did not deny drafted figures unveiled by Bloomberg on September 22 which cited that the Russian defense budget will reach RUB 10.9 trillion or 6% of gross domestic product in 2024. (Note: In 2023, defense spending is expected to be 3.9% of GDP, while this was 2.7% of GDP in 2021). Despite this, we foresee a pause on territorial advance by Russia or Ukraine and increasing signs of exhaustion on both sides as there could be a pause and a frozen conflict (here) with or without a ceasefire deal for a long time, which we expect a halt in military spending, and this may slow down contribution of the military expenses over the GDP growth.
Another factor to consider is the upcoming 2024 presidential elections as the country will choose its next president in March. Putin remains as the strongest candidate according to various polls and we think he would win the elections as he is seen as the most popular political figure in Russia. We foresee 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.