The Russian economy, despite the sanctions, performed quite well in the first half of the year. Apocalyptic forecasts (a 10% fall in GDP, a strong devaluation of the ruble and a sharp acceleration of inflation) did not justify themselves. Already in the second quarter, business activity indicators began to grow, inflation began to slow down, and the ruble strengthened.
The latter is connected not so much with the growth of commodity prices in the world markets, but was the result of the sanctions imposed against the Russian Federation. The blocking of foreign exchange reserves and other financial restrictions actually led to the abolition of the fiscal rule, so a large trade surplus formed on the market in the face of reduced imports. Demand for currencies is much lower than the amount of currency entering the country, and as long as this trend continues, the ruble continues to be strong. According to the results of the first half of the year, the ruble became the best among the currencies of developing countries, most of which showed a significant weakening against the US dollar.
For the Russian economy, however, a strong ruble creates additional difficulties, especially given the hypertrophy of the oil and gas sector. Due to the excessive strengthening of the national currency, not only the budget suffers, but also companies in the manufacturing sector, losing their competitive positions in the market. This creates long-term risks of economic degradation and contradicts the declared goals of the government: to ensure the country’s technological sovereignty, reduce dependence on raw materials and reduce macroeconomic risks.
Judging by the statements of representatives of the economic block of the government, the optimal rate for the economy is 70-80 rubles per dollar. To weaken the ruble, the authorities could, for example, introduce a new budget rule, buy the currencies of friendly countries, increase the tax burden on oil and gas companies, and impose direct restrictions on exports. However, if the influx of currency into the Russian market continues (in particular, if the government’s measures to weaken the ruble are ineffective), and imports do not grow significantly, the Russian currency may consolidate at the level of 55 rubles per dollar.
On the contrary, with the growth of imports, measures to limit exports, as well as under the influence of external factors (in particular, a large-scale decline in energy prices against the backdrop of a global economic recession), the ruble exchange rate may drop to 70 rubles per dollar in the second half of 2022. An effective tool for weakening the ruble can also be the provision of large discounts on the supply of raw materials to friendly countries.
Such measures will lead to the maintenance of high world prices (if demand is maintained and oil supplies from Russia are reduced, the cost of a barrel of Brent will go to $140) and will restrain the strengthening of the ruble, and their impact on the financial performance of companies will not be so strong. All this will contribute to a decrease in activity in the raw materials and oil and gas sectors, and it will not be possible to avoid an economic downturn. Under such conditions, the baseline forecast assumes a fall in GDP by 3%.
But if this happens as part of a change in the structure of the economy, moving away from the focus on raw materials, then this will improve long-term forecasts. Combined with good financial results of companies, a shortage of labor resources, and a strong demand for import substitution, there will be favorable conditions for investment growth. Also a positive factor for the Russian economy could be the weakening or even lifting of part of the sanctions, which is quite likely in the event of a change in the ruling elites in a number of European countries. In this case, it is possible that the Russian economy may even show a slight growth – at the level of 2% by the end of 2022.
On the contrary, a significant decrease in export earnings (for example, as a result of lockdowns or a recession, the price of Brent will fall to $60 per barrel) will lead to a decrease in GDP. In a pessimistic scenario, the indicator will fall by 6%. Also, a sharp recession in the economy, a weakening of the ruble, an increase in unemployment and prices can also lead to the rapid withdrawal of resources from the primary industries and their transfer to manufacturing, including technology industries. As a result, the decline in GDP caused by pressure on the commodity sector may be much stronger than the results of forced investment in the desired sectors.
The author is the director for analysis of macroeconomics and financial markets of Alfa Capital Management Company
The position of the editors may not coincide with the opinion of the author
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