Russia Watch: recession partly shifts to 2023

According to Rosstat, Russia’s GDP shrank 4.1% yoy in Q2 2022 (0.4% in H1 cumulatively). The recession appears to be more L-shaped in comparison to earlier expectations and the shock is likely to shift more into 2023.

The official data suggest that retail and wholesale trade dynamics affected the economy the most. In Q2 2022 it declined by 14.1% yoy amid (1) shrinking gas exports to the EU, (2) weaker local consumer demand and (3) a slump in car sales due to production shortages and sanctions imposed on imports (however, car sales weight in total sector is only 5-10%).

GDP turned to the negative zone in Q2 2022

Source: Rosstat, RBI/Raiffeisen Research

Industrial production declined by 2.5% yoy in Q2. Compared to Covid-19 shock of Q2 2020 when IP shrank 6.2% yoy, the current slump appears to be mild. In our view, the key adverse effect should come from the EU oil embargo (to be implemented stepwise starting from December 2022). On the one hand, its delayed nature allows for a relatively moderate shock in 2022 but, on the other hand, it should shift the lowest recession point into 2023. During this period, the support to the economy is expected to come from (1) increased anti-crisis government spending (the updated budget plan is to be unveiled only in October) and (2) swiftly neutralized monetary policy, which could keep private consumption from additional cooling.

With this in mind, we have updated our economic forecast. We now expect GDP decline to be milder in 2022 (-3.5% yoy) this year followed by a comparable downturn in 2023 (-4.0% yoy). From the midterm perspective, we maintain our conservative view. The eroding impact of sanctions on industrial production could harm the long-term GDP growth potential (0.9% yoy starting from 2024 in our forecast).

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Gregory Chepkov is a macroeconomic analyst at Raiffeisenbank Russia. He joined the team in December 2020, during the first pandemic winter. Gregory originally joined Raiffeisen Bank in 2017 and before the research department, evolved his skills in integrated risk management, in particular performing macroeconomic stress-testing exercises. BSc in Moscow Institute of Physics and Technology and MSc in Higher School of Economics gave him a solid background, which was widened by becoming a Certified FRM. His extracurricular activities include being a football team captain and enjoying freeride snowboarding.

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Stanislav MURASHOV

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Stanislav Murashov, chief economist for Russia at RBRU, director. Has more than 10 year experience in macroeconomic analysis. Joined Raiffeisenbank in 2016, before worked for Rosbank (Societe Generale group) as an economist for Russia. Previously, worked for the Ministry for Economic development of Russia and the Central Bank of Russia.