Russia survives sanctions by investing like never before

Russia is seeking to emerge from the self-inflicted economic crisis that threatened to provoke the deepest recession of the government of President Vladimir Putin in more than two decades.

Rising commodity exports funneled capital into government and corporate coffers, fueling a surge in business investment unprecedented in previous economic contractions and crucial for war financing since Russia’s invasion of Ukraine a while ago. anus.

Companies large and small invested to replace foreign equipment and software or funneled money to build new supply chains to reach alternative markets. Faced with initial forecasts of a decrease of up to 20% in investments, Russia, on the other hand, registered an increase of 6% in 2022, according to Bloomberg Economics.

But just as tighter export restrictions choke off Kremlin revenue, the future is also far more dangerous for investment. Although Russia’s central bank and Ministry of Economy anticipate a period of stability or just a slight decline, Bloomberg Economics expects fixed asset investment to decline by 5% in 2023, a major hurdle for an economy that is supposed to contract a bit. 1.5%

A decline in corporate profits and pressure from sanctions will stall momentum and add to uncertainty that will likely lead to a drop in spending, albeit on a smaller scale than the first forecast for 2022, according to Olga Belenkaya, an economist at Finam in Moscow.

“It seems that investment supported by the Government and state corporations may increase further, but investment from the private sector will decrease“, said.

invest to survive

Last year’s resilience was a matter of survival for companies that now need to endure what the central bank calls a “structural transformation” of an economy beleaguered by sanctions. The Bank of Russia has said that the vast majority of companies boosted investment or kept it unchanged in 2022.

That helps explain why output contracted by just 2%, well below the economic collapse predicted immediately after the invasion in late February.

As Russia tried to cope with shortages caused by sanctions, new private companies sprang up, many backed by state loans or subsidies.

In the Pskov region of western Russia, a factory plans to produce industrial batteries to help replace imports. A chemical company that opened in Chuvashia, on the Volga, seeks to produce hydrogen peroxide in volumes that should fully satisfy domestic demand. Near Moscow, the facility began to produce hydraulic equipment and pharmaceuticals.

The disappearance of many imports has become one of the forces distorting Russia’s war economy, driving growth based on less sophisticated technology toward what its central bank called “reverse industrialization”.

And the money that government and business are now pouring into the economy also reflects the urgency of developing new infrastructure for trade after Russia had to abandon routes to Western markets that once cost hundreds of billions of dollars to build. .

The shift away from traditional customers from Russia meant companies including gas giant Gazprom PJSC had to double its investment program, with a plan to raise spending to a record by 2023 to finance a reorientation of exports to the east.

However, the costs of economic isolation will only increase over time, and Russia is likely trading self-sufficiency for more expensive and lower quality products.

And for most companies, the focus now is more on survival than development. A survey conducted by the Bank of Russia revealed that among small and medium-sized businesses, only one in four companies is preparing to further increase investment. Among large companies, a third plan to raise them.