In the first quarter of 2024, the Russian economy accelerated again after some slowing down in the previous quarter. By May, there were signs that the trend of decreasing inflation had also been interrupted.
The acceleration of the economy can be attributed to the high level of budget spending at the end of 2023. Additional inflationary pressure can be attributed to both common factors (transfer of costs from businesses to prices), and specific ones: a reduction in imports due to the threat of secondary sanctions against the banks of ‘friendly countries’. While export revenues in the first quarter remained at last year’s level, imports fell by almost 10%.
The extraordinarily high refinancing rate, which has been at 16% for five months, is not producing any of the expected effects — neither a sustained reduction in inflation, nor a cooling of the economy. This has prompted the Central Bank to discuss further rate hikes. However, thus far, the regulator has limited itself to verbal interventions.
The current state of the Russian economy is characterised by a contradictory combination of effects reflecting the influence of both economic and non-economic factors. Among the latter, the budgetary impulse and the ‘flickering’ effect of sanctions are crucial. Together they ensure a certain unpredictability of economic dynamics and limited opportunities to influence these by standard economic policy measures. While the Russian authorities continue to press the gas and brake pedals simultaneously in an attempt to achieve both high output and low inflation, they have yet to succeed in this.
The Russian economy continues to accelerate. Rosstat estimated GDP growth in the first quarter at 5.4% (annualised), after 4.9% in the fourth quarter of last year. Relative to the fourth quarter of 2023, excluding seasonality, Raiffeisenbank analysts estimated that the economy grew by 0.8% in January-March, compared to a 0.5% increase in the fourth quarter of 2023, when the economy showed signs of slowing down. The economy's return to an accelerating trajectory came as a surprise to analysts and experts at the Central Bank.
However, inflation has also resumed its upward trend. According to Rosstat, prices increased by 0.38% in the first 20 days of May. This is one and a half times more than in the previous three weeks and translates to a monthly increase of 0.6%, according to analysts at the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF). Prior to this, the monthly price increase had been declining: 0.86% in January, 0.68% in February, 0.37% in March, and 0.50% in April.
There are signs of a trend reversal in inflation expectations as well. According to the monthly survey ‘inFOM’ commissioned by the Central Bank, they increased slightly. The median inflation expectation for the next 12 months rose from 11% to 11.7%. This increase was driven by respondents without savings (i.e. poorer). They raised their estimate from 12.2% to 13.5%, while inflation expectations among more affluent respondents with savings remained almost unchanged. As the expectations of citizens without savings are generally quite volatile (they feel the rise in prices more acutely), the trend may not materialise, Raiffeisenbank analysts note. However, the fact remains: the trend of dynamically decreasing inflation expectations observed over the past three months has halted. Business price expectations also jumped by 1 percentage point in April and remained high in May (19.6%), according to Central Bank enterprise monitoring data.
These two accelerations—in economic growth and inflation—are occurring against the backdrop of an extraordinarily high refinancing rate. The Central Bank raised this to 12% nine months ago and then to 16% five months ago. In a market economy, such a measure unequivocally leads to a slowdown in both inflation and growth. At the turn of 2023–2024, both the economy and inflation seemed to show, albeit a rather weak, response to the rate hike, meaning they were slowing down. However, this trend has now been interrupted.
This reversal is likely related to the cyclical nature of budget financing: 17% of all annual expenditures were spent in December 2023, which could have influenced output at the beginning of 2024. According to this logic, the acceleration in growth should be followed by a slowdown in the next period. The analysts at Raiffeisenbank also share this view. They cite the budgetary stimulus, which is not influenced by the refinancing rate, as the main reason for the acceleration in the first quarter. However, growth will subsequently be limited by two factors: the near-maximal utilisation of production capacities and a shortage of labour.
As for inflation, the situation is somewhat more complicated. It is supported by a high level of consumer sector lending, which allows businesses to pass rising costs onto prices. In the near future, additional factors of inflationary pressure will be the growth of tariffs and the cessation of price regulation for a number of goods, according to the Telegram channel ‘Tverdye Tsifry’ (the return of the duty on imports of frozen chicken meat and eggs, which was temporarily lifted in January as part of the fight against inflation during the pre-election period). Moreover, prices will rise if the price stabilisation mechanism for essential goods is weakened. A year ago, the federal government empowered regional authorities to enter into voluntary agreements with manufacturers and retail chains to ‘restrain’ prices. As of late April, such temporary agreements were in effect in 27 regions, according to the Federal Antimonopoly Service (FAS). However, such restrictions typically only delay price increases.
At the same time, there is another pro-inflationary factor reflecting the ‘flickering’ impact of sanctions. This is the reduction of imports, which is believed to be caused by problems with payments as a result of the threat of secondary sanctions (→ Re: Russia: Beijing-style Friendship). According to the Central Bank, Russian exports totalled $133.6 billion in January-April, virtually unchanged from last year's $136.7 billion; at the same time, imports fell from $99.5 billion to $89.9 billion (-9.6%).
This decline is unlikely to be explained by the weakening of the ruble in the third quarter of 2023. At that time, imports reacted weakly, and since then the ruble has actually strengthened by 10%. A detailed analysis by The Bell shows that imports from nine ‘friendly’ countries (Turkey, Hong Kong, Serbia, Kazakhstan, Azerbaijan, Armenia, Georgia, Uzbekistan, Kyrgyzstan), through which Western goods flow to Russia, decreased by as much as 25% in the first quarter of 2024. At the same time, imports from China increased in January-February compared to the same months last year, while in March-April they decreased by 13%. Both of these facts indicate that the decline in imports is most likely due to the exchange rate. Thus, the strengthening of the ruble in early 2024 (relative to the values of the third and fourth quarters of 2023) was accompanied not by an increase in imports, but, on the contrary, by their reduction. Therefore, there was no disinflationary effect of the ruble appreciation: there were less, not more, goods on the domestic market.
The fact that the current Central Bank rate is not leading to cooling of the overheated economy (neither from the point of view of output growth, nor from the point of view of price growth) is pushing the Central Bank to discuss further rate increases. This was first raised at the Board of Directors meeting in February and was discussed again in April. Most participants agreed that ‘new pro-inflationary surprises from economic activity’ require additional tightening of monetary policy. However, there was also a hypothesis that ‘the high growth rates of the economy may be partly due to the ongoing increase in its potential after its decline due to the pandemic and the geopolitical shock of 2022’. This assumption seems somewhat odd, as the economy grew at an annual rate of 1.1% between 2009 and 2019. In 2020-2023, this rate was 1.4% per year. Meanwhile, although federal budget expenditures averaged 18.1% of GDP in 2011-2019, they averaged 19.7% in 2020-2024.
Nevertheless, it was decided not to raise the rate at the April meeting because ‘for consolidating the disinflationary process, the future trajectory of the rate is more important than the current decision’. This discussion will be revisited at the next rate meeting in June, promised Deputy Chairman of the Central Bank Alexei Zabotkin. In other words, the Central Bank is currently trying to influence the market through verbal interventions, avoiding raising the rate. And there are reasons for this: the rate cannot influence either the dynamics of budget injections or the import dynamics related to ‘secondary sanctions’. Moreover, a further increase in the rate cannot affect the dynamics of output in those sectors that are stimulated by budget orders, but may lead to a slowdown in the ‘civilian’ sector, further limiting the increase in the supply of goods on the domestic market.
The current state of the Russian economy is characterised by a contradictory combination of effects reflecting the influence of both economic and non-economic, regulatory factors. Among the latter, two are of decisive importance: the budgetary impulse and the ‘flickering’ effect of sanctions, which periodically intensifies and then returns to the background level. Together, they create a certain unpredictability in economic dynamics and limit the ability to influence this with standard economic policy measures. While Russian authorities continue to simultaneously press the gas and brake pedals, striving for both high output and low inflation, they have yet to succeed in this.