The Russian economy, doomed to structural transformation and strong uncertainty

The Russian economy is headed for a large-scale structural transformation to cope with the impact of the unprecedented sanctions that the West has imposed on Russia for its military offensive in Ukraine, which implies a long period of strong uncertainty, the Bank of Russia.

Russia closed 2021 with a growth of the Gross Domestic Product (GDP) of 4.7% compared to the previous year after recovering from the recession in which it was plunged by the coronavirus pandemic, according to the Federal Statistical Service (Rosstat).

This is the largest increase in GDP since 2008, when the Russian economy grew by 5.2%, according to the official TASS agency.

The Central Bank of Russia (BCR) predicted on February 21 – three days before the Kremlin announced what it called a “special military operation” to “denazify and demilitarize” Ukraine- GDP growth of 5.5% year-on-year in the first quarter and for the year as a whole an advance of between 2% and 3%.

Russian GDP will suffer

However, he admitted that the international sanctions against the bank itself, various financial entities and against multiple economic sectors in the country will cause a “reduced GDP in the coming quarters”although he did not dare to put figures to the “economic slowdown” that the country will suffer.

Nor does it opt ​​for an estimate of year-on-year inflation, which has been “significantly accelerated since early March.”

The inflation rate in Russia between March 5 and 11 rose to 12.54% from 10.42% in the previous week, according to the Ministry of Economic Development.

Despite this, the board of directors of the BCR today kept the interest rate at 20%, after having practically doubled it last month (from 9.5%) due to the first Western sanctions.

The Governor of the Bank Elvira Nabiulinastill thought in mid-February that inflation was going to return in 2023 to the objective of the 4%, but the current situation has forced him to delay it to 2024.

Ruble despised and exit of hundreds of companies

The entity admits a dark outlook for the economy due to the outflow of capital, foreign companies, inflation, an unemployment rate that will increase after reaching 4.3% in December, according to Rosstat, and the sharp depreciation of the ruble.

The national currency stood after the BCR decision at 103.61 rubles per dollar and 112.85 rubles per euro.

“The Russian economy is entering the phase of a large-scale structural transformation, which will be accompanied by a temporary but inevitable period of rising inflation,” noted the BCR.

Companies in many industries report logistical and production difficulties amid trade and financial restrictions imposed on Russiaadmits the Bank.

In Moscow alone, some 300 foreign companies – out of several thousand – have suspended their activity, the mayor, Sergei Sobyanin, said today.

“A sharp rise in uncertainty weighs heavily on sentiment and expectations of households and businesses”acknowledges the Russian monetary entity.

The BCR warns that, “The Russian economy faces considerable uncertainty regarding the speed and magnitude of the adjustment in aggregate supply in response to the recent increase in trade and financial restrictions.”

For Nabiúlina, proposed today by the Russian president, Vladimir Putin, for a term of another five years at the head of the BCR, business adaptation to change, including in the production and supply chains, will become a key factor.

measures against unemployment

“The stimulus measures being taken by the government and the Bank of Russia will limit the scale of the economic slowdown. The path of recovery of the Russian economy will largely depend on the degree and speed of its adjustment to the new conditions”, says the Bank of Russia.

Russian Deputy Prime Minister, Tatiana Golikova, affirmed that the Government has allocated 78.8 billion rubles (US$ 7.503 million or 6.807 million euros) to support the labor market, and the Minister of Labor and Social Protection, Anton Kotiakov, promised funds to train some 250,000 employees of companies that restructure their processes with new equipment.

The foreign minister, Sergei Lavrovnoted that “Sanctions have always only strengthened us”since Russia faces restrictions since 2014, when it annexed the Ukrainian peninsula of crimea and began to substitute imports for domestic production, although it has not been successful in all sectors.

Putin acknowledged on Thursday that the sanctions against the banking sector, including the freezing of foreign exchange reserves of the central bankand against the supply of various goods “Obviously they create quite a few problems, but they also open up new opportunities”.

“Profound changes will be required in our economy. I will not hide it, they will be difficult. They will lead to temporary inflation and increased unemployment. Our task is to minimize these risks”said.

At the moment Russia seems to have avoided a suspension of payments, after Citibank, paying agent for foreign bondholders in Russia, received the US$ 117.2 million that the Russian State had to disburse as interest on Eurobonds.informed the Ministry of Finance.