20.10.22 Review

The Last Herald: The Central Bank of Russia admits that mobilisation has suspended economic stabilisation

The Central Bank remains the only government institution in Russia that allows itself to publicly assess the impact of the war and sanctions on the economy. According to Central Bank analysts, military mobilisation has led to a decline in consumer activity, a reduction in the labor force, and suspended the processes of economic stabilisation. Human resource shortages, they warn, will curb productivity, which has yet to cope with the deferred effects of sanctions, the impact of the oil embargo, and a decline in other exports. The Central Bank considers the de-inflationary effect of mobilisation a temporary phenomenon, while the pro-inflationary factors, among which are the lack of import recovery and the weakening of fiscal policy, are long-term.

The mobilisation announced by Vladimir Putin was another shock for the Russian economy: its recovery after the spring failure under the sanctions has stopped, and, judging by leading indicators, the GDP dynamics became negative again, as follows from the bulletin of the Central Bank Research and Forecasting Department "What the Trends Say".

The Central Bank's Macrodepartment in April 2022 first described the stages and content of the ongoing and future changes in the Russian economy due to the sanctions and war, calling them "structural transformation." The analysts of the regulator had warned then about reverse industrialisation — forced import substitution based on outdated technologies and deterioration of the population's living standards. Now they are the first from the "state camp" to assess the consequences of mobilisation — in conditions of low unemployment, it "creates new challenges for production processes and maintaining output, especially in the segment of small and medium enterprises, and negatively affects consumer and entrepreneurial confidence," the authors of the newsletter believe. 

The military draft and forced emigration of hundreds of thousands of Russians weakened consumer activity. At the end of September, households switched to daily consumption savings mode while partially refusing unnecessary expenses (entertainment, taxis, etc.). But the newsletter's authors suggest that consumption trends can quickly return to normal: according to "Sberindex", a rebound has already begun: the expenses of Russians on goods and services for the week of October 10-16 increased by 6.1% in annual terms, compared to 5.9% and 3.1% in the previous two weeks. 

Also, reducing the workforce due to the mobilisation and the mass outflow of Russians created risks for the continuity of some industries. "The worsening situation with the shortage of personnel in the labor market will hold back productivity growth [in the economy] in the long term," the Central Bank analysts believe.  

Risks of a prolonged recession remain because the main adverse effect of the oil embargo and the ban on the supply of innovative and high-tech goods in Russia is still ahead. It will become noticeable by the end of this year and will mainly occur next year, in 2023, analysts warned in the Central Bank newsletter. Until the impacts of the sanctions are fully evident and the economy adapts to them, there is no reason to talk about the possibility of transition to sustainable growth. At the same time, the risks of stricter sanctions are not going away, which means that the Russian economy may face new supply shocks. 

By the way, the non-food retail sector, which suffered most from the mass exodus of foreign suppliers and retailers, still lags far behind pre-crisis levels (the most prominent drop in spending occurred in the clothing, sports, furniture and appliances categories) and creates pressure on price growth even at low demand due to insufficient import recovery. Overall, the Central Bank expects an acceleration in consumer price growth soon — this scenario is supported by positive lending dynamics and budget projections for 2022-2023. In other words, the Central Bank analysts identify the budget policy as a pro-inflationary (accelerating price growth) factor, which means they believe that the planned budget revenues look overly optimistic. In contrast, the expenses presented in the budget package are understated, as we wrote earlier, and as a result, the budget deficit will exceed the planned 2%.