The Russian economy has shown phenomenal resilience

Russia's economy and budget went through a very unusual period in 2022, which will definitely remain in the history textbooks. Despite the colossal sanctions pressure from the West, our country's economy not only did not collapse, but even strengthened in a number of parameters – and surprised the whole world with this. Thanks to what did this happen?The year 2022 brought a lot of surprises in the economy.

Unprecedented tough sanctions were imposed against Russia. This includes blocking the foreign exchange reserves of the Russian Central Bank, and disconnecting many large banks from the SWIFT international settlement system. More than 1,000 foreign companies have announced their withdrawal from Russia.

"In fact, 2022 has broken many trends that have developed over the past few decades – Russia's orientation mainly to Western export markets, capital markets and technology. The government and the Central Bank of the Russian Federation have taken emergency measures to prevent the collapse of the economy. A sharp and painful reversal of Russia to the East has begun, a structural transformation "with great costs for both the Russian and European economies, and for the global economy as a whole," says Olga Belenkaya, head of the Macroeconomic Analysis Department at Finam.

"The past year can be called a turning point for the Russian economy both from the point of view of changing partners, and from the point of view of changing the structure of the economy and the transition to a greater degree of diversification," says Denis Perepelitsa, Head of the Department of Global Financial Markets and Fintech at Russian University of Economics. Plekhanov.

Vladimir Klimanov, Director of the Center for Regional Policy of the Institute of Applied Economic Research of the RANEPA, notes.

Everyone was surprised by the stability of the Russian economy – from Russian experts themselves to analysts of the largest international banks and funds. Back in the spring, many were sure that Russia would not be able to recover so quickly from the economic shock that happened in the winter.

"The geopolitical situation, the departure of many foreign brands from Russia and sanctions led to the collapse of the ruble in March 2022, which quite naturally led to a drop in industrial production, a drop in GDP, a sharp jump in inflation and a new round of falling real incomes of the population. That is, there has been a crisis in the Russian economy," recalls Natalia Milchakova, a leading analyst at Freedom Finance Global.

However, by the end of the year, the situation had seriously improved. "The fall in GDP in 2022 is expected to be in the range of 2.5-3.5%, but this is nothing compared to the fall in GDP by almost 9% in the relatively prosperous 2009. There was no such deep recession as in 2009, neither during the crisis of 2014-2016, nor in 2020, nor now, although the crisis of 2009 was the only crisis that Russia experienced without being under Western sanctions. Then there were no restrictions, and foreign manufacturers did not leave Russia, but there was a deep recession," Melchakova notes.

The same can be said about inflation. The maximum level of annual consumer price inflation in Russia since the beginning of the 21st century was recorded in 2015 – it is 13%, but in 2022, as expected, this maximum will not be exceeded, the expert adds. If in the spring the Central Bank of the Russian Federation predicted inflation by the end of the year at the level of 18-20%, then in fact it turned out to be near 12%. And in 2023, it is expected to go down.

Thanks to what did the Russian economy manage to survive?

Gas, oil, metals, mineral fertilizers, grain have risen sharply in price – and these are the main goods of Russian exports. They ensured the preservation of income even with a physical reduction in exports, Klimanov says. The actions of the government, the Central Bank and the regional authorities also helped, which were able to quickly adopt a large-scale package of anti-crisis measures.

Among other things, the growth of budget expenditures and preferential lending programs, the growth of investments in fixed assets and the preservation of record low unemployment contributed to the stability of the Russian economy, Belenkaya says. According to her,

The continued volume of oil exports, combined with the failure of imports, provided a record foreign trade surplus and a current account surplus, which is estimated to be about $ 250 billion. Coupled with restrictions on capital movements, this provided a serious strengthening of the ruble exchange rate. By the end of June, the dollar/ruble exchange rate briefly dropped below even 50 rubles. The strong ruble, in turn, had a strong deflationary effect, Belenkaya points out.

"All these, at first glance, rather unexpected events of 2022, actually have the same explanation: in 2022, the Russian economy, firstly, is no longer as much dependent on hydrocarbons as 13 and even seven years ago; secondly, the Russian economy is no longer so dependent from imports from Western countries, as during previous economic crises," says Milchakova.

According to her, for almost 20 years the Russian economy has been built on a rather vulnerable economic model under the conditional name "oil and gas in exchange for cars and consumer goods." However, the Russian food embargo imposed in 2014 on many types of food from "sanctioned" countries has largely helped to get rid of excessive dependence on imports, and in 2022 – to mitigate the effects of sanctions.

Another important point: in 2022, Russia stopped counting on assistance in the form of investments from the West, and on the other hand, began to strengthen cooperation with friendly countries from the BRICS group, the EAEU and OPEC+, Milchakova notes. The active process of de-dollarization of the Russian economy, which began in 2022, will continue, and domestic companies will be engaged in the vacant places on the Russian market.

Despite the sanctions, Russia has shown an increase in indicators in housing construction, road construction, as well as in agriculture. So, already in 11 months of 2022, a record number of housing was built in Russia - 93.26 million square meters of housing. The volume of commissioning exceeded last year's by almost 15%, although 2021 was a record year for housing commissioning in the entire history of our country, including the Soviet period.

The year 2022 was also the best in Russia in terms of the pace of road construction since the USSR. This year, 165 million square meters of asphalt were laid on regional and local roads (compared to 162 million square meters last year).

Agriculture has been showing growth in the past year. In ten months, the output has grown by 5%. The grain harvest, which is the main commodity for export in agriculture, has been repeatedly adjusted upwards. By the end of the year, it became clear that this was again a record harvest. The Ministry of Agriculture reported on 159 million tons of grain, of which over 105 million tons is wheat. Also, the development of industry is helped by a good load of defense industry enterprises.

"So the negative events of 2022 for Russia turned out to be just one of the many crises that need to be experienced in order to become stronger and overcome dependence, firstly, on imports of consumer goods, and secondly, to solve the issue in general so as not to rely too much on imports, but to produce non-food products independently," Milchakova concludes.

"In general, the situation is stable. With the effective transformation of the Russian economy at the end of 2023, it can move to growth. However, this will happen provided that the global recession does not begin, and the chances of its beginning are very high," warns Perepelitsa, from the Russian University of Economics. Plekhanov.

Olga Samofalova