Russian Economy Expands by 4.5% YoY in May
Bottom Line: According to the figures announced by the Russian Ministry of Economic Development, Russia's GDP grew by 4.5% YoY in May. We foresee Russian economy will expand by 2.5% in 2024 driven in part by a significant increase in military spending due to intensified Russian offensive operations in Ukraine coupled with rising salaries and payments to the families of the fallen and injured boosting consumption despite tight monetary policy, sanctions and higher price pressures remain restrictive.
Figure 1: Annual Growth Corporate and Retail Loans (%), 2018 - 2024
Source: Central Bank of Russia (CBR)
Russian economy continued its strong growth trend in May and grew by 4.5% YoY from 4.4% in April particularly due to fiscal stimulus, increased military spending coupled with strong household consumption despite the fact that economy remains strained by sanctions, export controls, high inflation, and tight labor market conditions.
Emphasizing strong GDP growth figures in 2024, President Putin said on June 28 that the Russian economy is growing fast, and added that "We will see what the first half brings, but something around 5% growth, demonstrating Russian economy outstrips Western economies."
In addition to increasing military spending and fiscal stimulus, it is worth noting that oil export volumes are reported to hold steady despite sanctions, which also contributes to growth taking into account that oil and gas revenues remain the most important single source of cash for the country. Ministry of Finance of Russia data showed on July 3 that proceeds from oil and gas sales for federal budget rose by around 41% YoY in H1 2024 and amounted to 5,698 trillion roubles(RUB) ($65.1 billion), due to rising oil prices and the weaker RUB, Reuters reported.
Additionally, according to CBR’s Monetary Conditions and Monetary Policy Transmission Mechanism report published in May, corporate lending remain strong as the annual growth in the portfolio of corporate loans was 20.4% in April. High consumer activity, positive consumer sentiment, and subsidized lending programs were still factors supporting great consumer demand for loans. The growth rate of the portfolio of unsecured consumer and car loans remained high and volumes of new subsidized mortgage loans were still large.
In this framework, we foresee Russian economy will expand by 2.5% in 2024 driven in part by a significant increase in military spending due to intensified Russian offensive operations in Ukraine coupled with rising salaries and payments to the families of the fallen and injured boosting consumption, despite shortage of skilled labor, lack of high-tech investments, high borrowing costs due to tight monetary policy, and higher price pressures remain restrictive. (Note: IMF forecasts economic growth to record 3.2% in 2024, and the Organization for Economic Co-operation and Development (OECD) expects growth to be 2.6%).