The coming year 2023 may become even more difficult from the economic point of view than 2022. With a high probability, we will see a drop in the volume of exports of Russia's most profitable goods, oil and gas – which means that the budget will also suffer. However, our country has an answer to this challenge.In 2022, Russia was able to avoid a sharp drop in GDP (unlike how it happened in 2009) and acceleration of inflation to record values.
In 2023, the Russian economy is expected to even improve its most important indicators.
"Inflation should slow down to 5-8%, the decline in GDP may not exceed 1%. But in Europe, the probability of a recession is above 50%," says Natalia Milchakova, a leading analyst at Freedom Finance Global.
Alfa-Bank expects a sharp decline in inflation in April 2023, but by the end of the year growth will accelerate to 6%. Compared with inflation of 12% last year, this will be an excellent result.
But the ruble, most likely, will not be so strong. The strengthening of the ruble has already played its role, restraining the growth of inflation. In 2023, the ruble exchange rate will fall to 70-80 rubles per dollar, according to most Russian companies. This will already be necessary to support the income of the Russian economy from exporters and budget revenues.
Natalia Orlova, Chief Economist at Alfa-Bank, believes that the weakness of the Russian currency will not lead to an acceleration of inflation. The Russian Central Bank may continue to lower the rate to 6% to help the economy and the budget.
"We are considering two macroeconomic scenarios for the coming year – basic and stressful," says Natalia Lavrova, Chief Economist at BCS World of Investments. – The baseline scenario assumes that in 2023 the global economy will grow by 2.5%. As part of the stress scenario, we analyze the resilience of the Russian economy to the global slowdown, assuming that global economic growth may decline from the 3.1% expected in 2022 to 1% in 2023."
In the baseline scenario, Russian GDP will continue to decline at the beginning of 2023, but will resume moderate growth closer to the second half of the year. GDP in 2023 will decrease by 2.6%, but in 2024 it will reach growth of 1.4%, which corresponds to the pre-crisis potential growth of the economy, Lavrov notes.
"The main challenge of 2023 may be the change of Russia's economic model itself. The Russian economy ceases to focus only on the supply of raw materials to the West, as it was before 2022. Now exporters of oil, metals, mineral fertilizers are redirecting their supplies to the East," Milchakova says.
Russian business has no problems finding new customers. There are enough people willing to buy Russian hydrocarbons, metals and other raw materials. China and India will play a huge role in this regard, given their significantly higher consumption compared to the European market.
"It is much more important to establish a new infrastructure for the export of raw materials in the eastern and southern directions. We will have to solve the problem of the shortage of tankers for oil transportation, the problem of cargo insurance, and build new ports on the Black Sea instead of the Baltic, including oil loading ports. Russia needs new gas pipelines and infrastructure for the production and transportation of LNG and so on. It will not be possible to cope with all these challenges within one year, the construction of a new infrastructure will take at least two to four years," Milchakova says.
Another challenge that the Russian economy will face in 2023 is the decline in oil and gas production. In 2022, Russia existed in comfortable conditions, since sanctions against oil were introduced only at the end of the year. And Russia managed to redirect energy flows to China, India and Turkey. This made it possible to increase oil production by 2% in 2022 (up to 525 million tons) and increase the production of petroleum products by 5%.
In the new year, Russia will have to face a decline in oil production. According to Deputy Prime Minister Alexander Novak, in response to the oil price ceiling, Russia will reduce oil production at the beginning of the year by 5-7%, or by 500-700 thousand barrels per day.
Russian gas production has already decreased by 18-20% in 2022 – to 671 billion cubic meters (of which 470 billion were consumed by the domestic market). The decline in production may continue in 2023 if the Ukrainian gas delivery route is completely blocked. All this will lead to a drop in exports of raw materials, and this is a key source of revenue for the Russian budget.
"It will be almost impossible to keep the significant export revenues of 2022 on the horizon of 2023. Crude oil exports may suffer, given the introduction of an oil price ceiling. Gas exports may decrease by 50% in 2023 due to a decrease in supplies to the EU.
Exports of petroleum products, which will face restrictions from February-March 2023, will be difficult to redirect from the EU to Asia due to low demand for these goods in Asian markets. These three product categories account for approximately 50% of total export revenues, and their dynamics will have a serious impact on the Russian trade balance," explains Natalia Orlova.
The reduction of budget revenues is, in fact, another challenge of 2023. "According to our estimates, the gap between the planned budget revenues and the actual figure may amount to 1 trillion rubles. Thus, the budget deficit in 2023 may exceed 2.4% of GDP and remain approximately at this level in 2024. This means that the search for sources of income can remain on the agenda of the authorities," Natalia Lavrova notes.
However, Russia has the resources to close budget holes. According to the expert, the government, as an alternative, can continue to increase its debt obligations, although Russia still remains the country with the lowest level of public debt compared to both developing and developed countries. On the other hand, the authorities can allocate funds from the National Welfare Fund (NWF) to cover the deficit.
Another challenge is import substitution. "Low oil prices will lead to more modest export flows, but they will be partially offset by weak imports. Although imports even in 2024 will remain 5% below the pre–crisis level of 2021, because a significant part of Russian imports are under sanctions and are unlikely to be completely replaced by goods from other countries," explains Lavrov. All this will lead to a narrowing of the current account surplus and a weakening of the ruble.
According to Orlova, imports of goods to Russia had already recovered strongly by September, and in the third quarter it was only 6% lower than the average monthly level of 2021. Russian imports from China have already fully returned to pre-crisis levels.
However, the expert sees Russia's increasing dependence on China. For example, car imports from China increased by a third in the ten months of 2022. Imports from Turkey have tripled. Orlova worries that on the threshold of 2023, import substitution is no longer central to the economic agenda, and it is the expansion of trade ties with China, Turkey and India that is becoming increasingly important against the background of declining imports from the EU.
"In 2023, it is necessary to lay the foundations so that the painful points of the economy, which were previously replaced by imported products, can be turned into points of its growth. Previously, Russia relied on the import of many goods from Western countries and from China, and now it is important to create its own production. If the state is properly puzzled by the idea of developing, for example, its own high–tech industries, and starts investing at least part of the NWF funds in them, then in 10 years, or maybe even earlier, we will become competitors of China and even South Korea and Japan in the production of, for example, consumer electronics and appliances," Natalia believes Milchakov.
That is, it is important that the state invests in private sectors of the economy and creates conditions for profitable private investment. This has already been done, for example, in agriculture.
Olga Samofalova