Russia’s economy expected to outpace Germany and Britain in 2023

They look, on the face of it, like mistakes. This week, number crunchers at the International Monetary Fund released forecasts saying that over the coming year, Russia’s economy will grow, while Britain’s will contract. And that Russia will actually grow faster than Germany, Europe’s economic powerhouse.

But there are no mistakes — just surprising turns of events, in all the countries involved.

The numbers would have been hard to imagine in the early days of the war, when Western sanctions sent the Russian stock market and the local currency, the ruble, into free fall, and hundreds of international firms — from McDonald’s to Boeing — pulled out of the country. In March 2022, U.S. Treasury Secretary Janet Yellen confidently predicted that “the Russian economy will be devastated.”

Even the Russians expected a deeper economic crisis. The Russian finance ministry was reported to be bracing for a fall in GDP of more than 10 percent. As recently as December, a Reuters poll of 15 economists forecast a 2.5 percent drop for the coming year.

And yet here we are, at the beginning of 2023, and the IMF now predicts that the Russian economy, after contracting by 2.2 percent last year, will start growing again in 2023, expanding by 0.3 percent, and then 2.1 percent in 2024. As for those European powerhouses? The U.K. is expected to contract by 0.6 percent; Germany will still be in the black, but only just; growth this year is expected to come in at an anemic 0.1 percent.

“On the one hand, the Russian economy is definitely in a very complicated situation,” Sergey Aleksashenko, a former Russian central banker and deputy finance minister, said last month during a conversation hosted by the Center for Strategic and International Studies. But as for the notion that there has been a total “collapse,” he added, “It’s not true.”

Which begs the question: How did this happen?

For Russia, better news on the homefront …

The answer begins with two distinct economic stories: the first, about what has been happening inside Russia; and the second, about Russia’s links to the outside world.

Western sanctions were designed to pressure Moscow both domestically and internationally; the idea was to “hobble” Russia’s domestic economy and its trading relationships, as then-British Prime Minister Boris Johnson put it in late February 2022. The restrictions included measures to cut off Russia’s central bank from the international financial system, blocking its access to billions of dollars in overseas assets, and to expel the country’s private banking industry from the so-called SWIFT system that allowed it to transact with global counterparts.

The fallout was almost immediate. Ordinary Russians, worried about their savings as news about the sanctions hit the headlines, queued outside ATMs in early March, rushing to withdraw whatever cash they could amid fears that the banks might collapse.

But the evidence now shows that Russia experienced something of a domestic rebound in the second half of 2022. And the paradox is that the war itself has helped drive the turnaround.

While spending on various other domestic programs fell by roughly a quarter, and certain industries have suffered huge losses (according to one estimate, Russian auto sales were likely to end 2022 with a staggering drop of 60 percent), the domestic war economy has expanded dramatically — and more than made up the difference.

In this year’s budget, around a third of all expenditure is devoted to the security sector, according to a recent analysis by the Carnegie Endowment for International Peace. According to the business publication RBC, Russian military spending is expected to jump by nearly 5 trillion rubles ($71 billion) in 2023, with spending on domestic security and law enforcement expected to soar by nearly the same amount.

Last month, the Russian state-owned defense conglomerate Rostec said that, after stepping up production last year, it was further “increasing the pace and volume of production of weapons.” Spending is also rising on personnel: in December, Moscow said it would expand the size of its military from 1 million soldiers to 1.5 million — a sign of its struggle in Ukraine, but also confirmation of increased spending in the country’s defense sector.

The production spikes across the defense sector have meant that the overall statistics for Russian industry weren’t as catastrophic as one might have expected. Despite international sanctions, industrial production in the first 10 months of 2022 was down by a mere 0.1 percent. And it now is expected to grow.

“We have to understand that when you produce not butter but guns, the GDP may grow, and definitely that was the effect in the second half of 2022,” Aleksashenko, the former Russian central banker, pointed out.

… and lots of support from other countries

If the domestic picture was propped up by war spending, beyond its borders Russia has continued to trade relatively freely, and to the tune of tens of billions of dollars — even as sanctions made it harder for Russian firms to do business with foreign counterparts.

There are two principal reasons for this: Russia’s ability to persuade major trading partners to ignore the Western sanctions; and Russia’s vast and varied natural resources.

Russia continues to command dominant positions in the world’s oil and gas markets. It is also the world’s biggest exporter of fertilizer. And for many countries, pivoting suddenly from Russian supplies has proved too costly — whatever their views of the Ukraine war.

The result: Moscow’s clout in these markets has meant that, despite the efforts of the United States and its European partners, several countries have continued to trade at high volumes with Moscow. India is a prime example: While Western nations have moved to cut their dependence on Russian energy, India has sharply increased its consumption of Russian oil. Indeed, India is now estimated to be importing 1.2 million barrels of Russian oil each month — 33 times the levels seen a year earlier, according to Bloomberg data.

NATO ally Turkey also continues to trade with Moscow. In December, for example, it imported 213,000 barrels of Russian diesel each day, the most since at least 2016.

Imports to Russia have also proved more resilient than headlines about the sanctions would suggest, as Moscow deepens its relations with countries such as China and Turkey. Imports to Russia from Turkey, for example, in December stood north of $1.3 billion, more than double the levels seen a year earlier.

And in Europe itself, even as the continent rushes to end its dependence on Russian energy, leaders determined that they couldn’t simply turn off the tap when war broke out. The climate campaign group Europe Beyond Coal estimates that, despite the war, European Union countries have spent more than $150 billion — that’s right, billion — on Russian fossil fuels since Moscow’s invasion of Ukraine.

Troubles in Germany and the U.K.

While Russia found ways to trade and to prop up — at least temporarily — its economy domestically, its invasion of Ukraine triggered a sudden uptick in global energy and food prices. And that in turn pressured the economies of its rivals, including Britain and Germany.

As Grid has reported, the war created a particular economic trauma for Germany, which was heavily dependent on Russian energy supplies before the Russian invasion. Initially, energy prices soared, stoking inflation and hitting the wallets of tens of millions of ordinary Europeans. The impact has continued; recent figures showed that retail sales in Germany in December fell sharply from November figures, despite expectations of a slight rise for the Christmas season. Analysts had expected sales to climb by 0.2 percent; official figures showed that in fact they had cratered by 5.3 percent.

Food and fuel inflation, and its effect on the cost of living, have hit Britain hardest of all. It didn’t help that the U.K. endured its most politically fraught year in recent memory (marked by three prime ministers and competing economic policies) and that the country is only beginning to feel the negative impact of Brexit — Britain’s political divorce from the European Union, its biggest trading partner. As Sophie Hale, principal economist at the Resolution Foundation, an independent London-based think tank, told Grid in November: “If Brexit had not happened, I think the U.K. would be doing better relative to its counterparts.”

The upshot: Even as Covid-19 restrictions fell away and economy after economy started to recover, Britain lagged behind its international counterparts. And now the IMF forecasts that it will actually go in reverse.

And so what to non-economists may look like an accounting misfire by the IMF actually adds up: Russia is doing far better than most experts had anticipated — better even than some of the economically powerful nations that set out to punish the Kremlin for its invasion of Ukraine.

Back in May last year, three months after the invasion of Ukraine, Janis Kluge, an expert on the Russian economy at the Germany Institute for International Security Affairs, told Grid that “when [Vladimir] Putin says Russia has weathered the first shock of sanctions, you know, it’s hard to argue with that.”

Now almost a year into the war, and despite unprecedented action by the West, the statistics suggest that it’s still hard to argue with Putin’s assessment. Perhaps even harder now than it was then.

Thanks to Dave Tepps for copy editing this article.

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