In recent weeks, I've been immensely frustrated by the ongoing coverage of the Russian economy rooted in a simple narrative – it's beating or 'defying' expectations. Bloomberg is now forecasting 4.7% y-o-y GDP decline, for instance, while the Ministry of Economic Development has settled on a tidy 4% y-o-y GDP contraction, the Bank of Russia is working with a 4-6% y-o-y contraction, and Kremlin/Duma adjacent forecaster TsMAKP pegs it at 4.8-5% y-o-y contraction for the year. None of these figures add up to the 'collapse' scenario many in the West have quietly (or not so quietly) hoped for. Evidence of economic stabilization comes from the beginnings of recovery for imports, well flagged here by Elina Ribakova from Twitter:
We can pair this with another chart from Ribakova's feed (must follow if you like Russian macro!) on foreign company exits from Russia that capture the reality that a substantial share of companies in sectors not facing any direct sanctions are staying, at least for now:
Even with significant declines in demand, investment, or production within specific sectors of the economy, there remains some capacity to muddle through. Where I depart significantly from the 'beating expectations' discourse is that the initial expectations of all out collapse seemed exceedingly unrealistic given the relative size of the Russian economy and, further, that August marks an inflection point for the cumulative pressure of a variety of sanctions policies.
Andrei Belousov is one of the many economic spads within the presidential administration who does not have a sterling reputation with economy watchers in the weeds on Russia. But in an early August interview with RBK, he laid out the basic case for why 'beating expectations' misdiagnoses what's going on. In his own words, state policies are intended to hold the decline in retail turnover this year in H2 to about 8-9% y-o-y based on the fall in real incomes underway. That partially explains why the government is reportedly working up a limited stimulus bill to send out 10,000 ruble payments (or something like that) akin to the pre-election moves last year and limited relief in 2020. These payments are, of course, limited by the reality that a large expansion of the deficit will almost certainly be more inflationary than usual because of the relative loss of imports.
But Belousov points to a larger problem. Business investment has only just begun to decline significantly because so many of the outlays for 2Q into 3Q were planned prior to the invasion. Rising costs, falling revenues from reduced consumer demand, falling revenues from reduced industrial demand, all of it will drive investment down significantly in H1 2023 per their current assumptions. That tells us the 'expectations' game is mixing up how bad things are getting. Import recovery reflects the fact that few goods are directly sanctioned, it takes months to work out new supply routes, and most importantly that an overly strong ruble makes it cheaper to sort out parallel import or whatever else is needed than try to sink longer-term capital on an uncertain market with furlough-inflated employment rates to source things domestically. Since imported consumption is still far below pre-invasion levels in % terms, you have to ask yourself what exactly topline GDP figures are measuring.
As of two weeks ago, Vgudok published figures suggesting that the railfreight market is currently sitting on a surplus of 180,000+ freight wagons going unused. About 80,000 of that was gondola cars, open-topped rolling stock used to move bulk cargoes around. Coal is the single largest commodity moved by gondola cars and takes up a disproportionate volume of the national rolling stock fleet relative to the usual export earnings associated with the sector. The EU's import ban on Russian coal and ban on the provision of services for Russia's seaborne exports took effect in mid-August and exports from Kuzbass collapsed almost immediately. July already saw regional output down 20% y-o-y and now seaborne exports have virtually halted. Insurers and re-insurers are all clustered in Europe, and while replacements will eventually be found, the costs imposed on Russian firms will rise.
We are seeing another of countless chain reactions to come taking place. As coal output declines – MinEnergo warns it could fall as much as 17% for the year – that passes through to metallurgical firms procuring coking coal at higher prices as miners try to offset the loss of foreign currency earnings in the short-run. Those metallurgical firms then see construction demand is down (perhaps 20%, figures are hazy) and demand for end uses like railwagons are down and so on. This year's GDP figures are inflated by the relative value of Russia's commodity exports compared to levels of domestic consumption that are entering a period of continual downwards readjustment. It will bottom out eventually, perhaps as early as 2025 if the Central Bank is right (I'm a lot more skeptical). So no, the Russian economy is not beating expectations so much as constituted structurally to obscure some of the mechanisms of action that are starting to have profound effects. The process by which it adjusts to lower levels of investment, consumption, and production is not linear and rife with bottlenecks and trigger points that compound slowly and then quickly.
- China's imports of Russian gold rose 8.6 fold month-on-month in July vs. June to $108 million. Is it a big deal? Only because of the degree of capital flight from China of late, but my guess is that the surge reflects Chinese commodity traders' speculative appetites as continued US interest rate hikes offer the chance to buy lower, sell higher next year. Reports are that Russian exporters are selling at discounts as high as 30% since the EU embargoed purchases.
- As Kuzbass struggles, Al'bert Avdolyan is creating the third-largest coal producer in Russia by merging his assets in El'ga Ugol' and Sibanthracite to create ELSI. The announcement is a big deal because of Avdolyan's pursuit of his own privately-owned railway to ship production from El'ga, bypassing the political risks of Kremlin-negotiated export quotas for coal on the Trans-Siberian and Baikal-Amur Mainlines. That's leverage in a period where investment is harder and harder to come by.
- EAEU members are in talks to launch a new payments platform/more infrastructure to settle more trade and transactions in national currencies. I'm not holding my breath since any progress would not obviate the business case for using USD or Euros if you aren't under financial sanctions like Russia.
- Ruble earnings from oil revenues have finally hit the 5,000 mark once more, helping ease some of the budgetary pressures that blew up in July. What I think is more important to track in the coming weeks and months is where MinFin lands in regards to reinstituting a new budget rule to sterilize more currency earnings to weaken the ruble. The trouble there, of course, is that doing so would be foregoing huge inflows that could be used to finance capital investments, social spending, and more.
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