Revised Russian GDP and Economic Forecast 2022

Russian economists provide an update on Russia in light of the current sanctions and financial strains. Takeaway: A severe global recession is imminent.

The Russian business magazine ‘The bell‘ has published a new update of the Russian economic outlook for 2022. The original text is in Russian and can be consulted here. We provide the English translation below.

This is the first analytical forecast for 2022 of falling Russian GDP and inflation growth, which will be a function of the Russian Central Bank rate and impacted by the effect of the US oil embargo .

The Bank of Russia, interviewing economists and analysts, released the first assessment of the decline of the Russian economy and the growth of inflation. According to the experts surveyed, by the end of 2022 we will see a decline in GDP of 8% (this is the maximum since 1998), inflation at 20% and the dollar rate at 110 rubles.

The first supporting official statistics have been prepared. A week after the start of the “special military operation”, inflation accelerated by a multiple of four. The rise in oil prices that could increase export earnings and support the ruble does not lead to such an effect due to sanctions and the voluntary refusal of consumers to buy Russian raw materials.

The Central Bank Survey released the results of a monthly survey of 18 economists from authoritative bodies with estimates of key macroeconomic indicators to 2022-2024. Central Bank consensus forecasts typically don’t get much attention – but today they have become much sought after after the start of the ‘Special Military Operation’ to assess the coming decline of the Russian economy.

The median (most common) ratings of economists turned out to be:
GDP: a fall of 8% in 2022, instead of a growth of 2.4%, which appeared in the February forecast. This is the biggest drop since 1998.
Inflation: 20% at the end of 2022 instead of 5.5%. If correct, it will be the highest since 2000.
The dollar rate: 110 rubles at the end of the year instead of 75 rubles. Today, the dollar costs 118.5 rubles.
Card rate: 18.9% instead of 9.1%. Currently it is 20%.

Forecast 2023 / 2024:

Analysts say Russian GDP will grow by 1%, while inflation will decline to 8% – but the ruble will still depreciate to 118.4 to the dollar.

In 2024, GDP will increase by 1.5%, inflation will slow down to 4.8% (still above the 4% target set by the Central Bank) and the dollar will remain at the level of 120 on ruble.

The extreme values ​​of the forecast range of Russian economists show inflation at 40%, a drop in GDP of 23% and a dollar at 130 by the end of 2022. On the side of the optimists, others say that inflation will not will not exceed 9.8%, the fall of the economy is 3.5%, and the dollar will fall to 100 ruble (but not lower – there are no such optimists).

Inflation is accelerating

The first inflation data in Russia following the situation in Ukraine, published yesterday by Rosstat, indicated that over the past week prices had increased by 2.2% in weekly terms, by 3.46% since the beginning of the year and 10.41% in annual terms.

Investment Director “Loco-Invest” Dmitry Field calls what is happening a “price shock, unprecedented in its nature” and lists the reasons: an increase in demand due to inflationary expectations (very likely) record high and worries about a shortage or complete disappearance of consumables (some temporary, some longer), the collapse of the ruble in the absence of certain benchmarks, logistical limitations and an extremely high level of uncertainty.

It was hard to predict inflation before and so it’s harder now, that’s problematic, but when you look at similar trends at the end of March, “we can easily see inflation in the order of 15 to 20% in annual expression”. Field notes that under the conditions of such current and expected inflation, the Central Bank rate of 20% may not seem high – and under current conditions, its level is important from the point of view of maintaining financial stability. : stabilize the situation with ruble deposits in banks and reduce the risk of a crisis in the banking system. “Among these considerations, the potential for increased rates is evident,” Field warns.

With Russian oil currency earnings from Russian exports (and especially oil exports) now being the main source of support for the ruble, these are the conditions for maintaining Central Bank reserves and the main reason why the national currency n has not yet completed its free fall evaluation. One of the first foreign exchange control measures was the requirement for exporters to sell 80% of their foreign exchange earnings.

However, this cannot completely stop the devaluation of the ruble, and the Central Bank must introduce new prohibitive monetary measures. On the evening of March 8, the United States introduced a ban on imports from Russia of crude oil, petroleum products, liquefied natural gas and coal. This ban itself is not fatal for both the United States and Russian oil exports.

Taking into account fuel oil and other petroleum products to Russia, US oil imports account for 7%, and Russian exports, the US takes less than 10%. Theoretically, Russia can redirect volumes to China and India, although this may take time and imply a discount for the price.

What is happening is reminiscent of the Arab oil embargo of the early 1970s, when the price of oil rose during the year, but the underlying fundamentals differ. The real blockade of Russian oil would require the introduction of secondary sanctions, as well as the cooperation of the EU, India and China. Nor can Europe refuse Russian oil (about 25% of imports).

But the incomplete and insignificant physical ban on Russian oil imports is very important ideologically.

First of all, it strengthens the “self-sufficiency” regime, and thus blocks about two-thirds of Russian oil exports. Global traders and consumers with the start of Russia’s “special operation” in Ukraine are supported by Russian oil. Last week, Russian Urals traded at a record discount to Brent — over $28 a barrel. But Shell, which bought a batch at a discount, came under such criticism that it very quickly announced a gradual complete refusal of Russian hydrocarbons.

Second, the West has shown Russia that the oil embargo is just a word and that it is ready for escalating sanctions. On this, Russia, in the face of Deputy Prime Minister Alexandra Novaka, has already threatened to respond to the Nord Stream – 1 gas pipeline overlap. “The execution of this threat is more likely to harm Russia, further reducing its foreign exchange earnings.”

The probability of the Snow Coma scenario of sanctions with measures against buyers of Russian oil is increasing every day. In this case, to go to the risk of Russian oil being taken away, Indian and Chinese buyers will have to be involved in the longer-term solutions put in place.

Europe will however be in a deep crisis. The more Russian oil leaves the market, the higher the prices will be, because it is impossible to replace it with something quickly (or its essentials). The only significant reserve of capacity comes from Saudi Arabia, whose relations with the United States are variable. This week, ex-energy minister Alexander Novak watched oil at $300 in the event of an extended embargo. Analysts cite this as indicative for at least $200 a barrel. Such prices signify a shock, comparable to the oil shock of the Iranian Revolution of 1979. It seems that now, as then, the world is heading for a harsh global recession.

By Peter Mironenko, Sergei Smirnov. With the participation of Yulia Starostina for “The Bell”.

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Briefing Russia is written by Dezan Shira & Associates. The company has 28 offices across Eurasia, including China, Russia, India and ASEAN countries, assisting foreign investors in the Eurasian region. Please contact Maria Kotova at [email protected] for Russian investment advice or assistance with market information, legal, tax and compliance issues throughout Asia.