IBY `RIL, we pointed to preliminary evidence that the Russian economy was defying predictions of collapse even as Western countries imposed unprecedented sanctions. Recent data further supports this view. Backed by capital controls and high interest rates, the ruble is as valuable today as it was before Russia invaded Ukraine in late February (see top chart). Russia appears to be keeping pace with payments on its foreign currency bonds.
The real economy is also surprisingly resilient. True, Russian consumer prices have risen by more than 10% since the beginning of the year as the initial depreciation of the ruble made imports more expensive and many Western companies pulled out and reduced supply. The number of companies defaulting on wage payments seems to be increasing.
But “real-time” readings of Russian economic activity are largely holding up. The overall power consumption has decreased only slightly. After a lull in March, Russians appear to be spending fairly generously in cafes, bars and restaurants, according to a spending tracker from Sberbank, Russia’s largest bank. On April 29, the central bank cut interest rates from 17% to 14%, a sign that a financial panic that began in February has abated somewhat. The Russian economy is undoubtedly shrinking (see chart below), but forecasts by some economists of up to a 15% contraction in GDP this year appear pessimistic.
Even before the invasion, Russia was a fairly closed economy, which limited the impact of sanctions. But the most important reason for economic resilience relates to fossil fuels. Since the invasion, Russia has at least 65 billion worth of fossil fuels. In the first quarter of 2022, government revenues from hydrocarbons increased by over 80% year-on-year. On May 4, the European Commission proposed an import ban on all Russian oil, which would be fully effective by the end of the year. Until then, expect the Russian economy to keep moving forward.
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