Despite an extremely high key interest rate of 21%, economic growth in Russia is only slightly slowing. In annual terms, GDP growth in October remained at September’s level, with a slight deceleration month-on-month when seasonally adjusted.
Output in the extractive industries, freight transportation, and agriculture is declining year-on-year. Retail turnover in October decreased for the first time in a long period. Construction is stagnating following the cancellation of indiscriminate preferential mortgage programs. The primary driver remains manufacturing. However, even here, as before, growth is primarily concentrated in sectors linked to the defence industry. Metallurgy and oil refining, which have the largest weight in manufacturing, are reducing output year-on-year. Leading indicators suggest that the situation will at least not worsen in November.
The Central Bank's ultra-tight monetary policy has curbed consumer lending but not corporate borrowing. Enterprises continue to secure loans, anticipating the disbursement of budget funds at the end of the year. Moreover, businesses remain confident in government support, a belief reinforced by statements made by Vladimir Putin at the ‘Russia Calling’ forum.
Thus, the Russian authorities continue to pursue their ‘two tap’ policy. While the Central Bank is trying to cool the economy by tightening its ‘tap’ (raising the key rate), the government is heating up the economy by injecting funds into the military economy through the ‘tap’ of budget spending and various benefits and subsidies.
According to the Ministry of Economic Development, Russia's GDP growth in October remained at September's annual rate of +3.2% year-on-year. However, seasonally adjusted month-on-month growth decelerated to +0.1% from +0.7% in September. Over the first ten months of 2023, the ministry estimates the economy grew by 4.1% year-on-year, down from 4.6% in the first half of the year. The primary driver of this gradually tapering growth remains industry, which expanded by +4.8% year-on-year, with manufacturing growing by +9.6% year-on-year. Wholesale trade and food services also contributed positively. Conversely, output in the extractive industries, freight transportation, and agriculture declined year-on-year. Construction has stagnated following the cancellation of indiscriminate preferential mortgage schemes. Retail turnover, for the first time in a prolonged period, slightly decreased compared to the previous month, driven by weaker sales of non-food items.
Rosstat data shows that industrial production in October increased by 0.6% compared to September, following near-zero growth in August and September. However, experts from the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) caution against interpreting this as a return to sustained growth. The observed growth is concentrated in a limited number of manufacturing sectors, primarily those linked to the defence industry. For example, the output of computers, electronic and optical products, according to Rosstat, in October grew by almost 40% year-on-year, up 3% from the previous month. Production of finished metal products grew by 24.4% year-on-year and 4.5% month-on-month, while production of other vehicles and equipment surged by 22.8% year-on-year and 9.1% month-on-month. Meanwhile, major manufacturing sectors such as metallurgy and oil refining, which carry the largest weight, saw year-on-year declines of –1.5% and –6.4%, respectively. Excluding the sectors related to the military-industrial complex, the CMASF experts found that since mid-2023, industrial output has grown by just 1%. Similar calculations by the Higher School of Economics (HSE) confirm this trend, showing that output indices (excluding defence) barely reach the levels achieved in December 2021.
Leading indicators suggest that the Russian economy will at least maintain its current state in November. The Global Russia Manufacturing PMI, compiled by S&P Global based on surveys of purchasing managers, rose to 51.3 points in November from 50.6 in October, indicating slight business activity growth (values above 50 signal expansion). In September, the PMI stood at 49.5 points. However, S&P Global analysts note that growth in both output and new orders was ‘modest’, and respondents highlighted an acceleration in cost increases.
A similar trend emerges in the Central Bank's regular survey of businesses. The composite business climate index increased to 5.5 points in November from 5.3 in October and 4.7 in September. While assessments of current business conditions remain negative (at –0.4), they have shown slight improvement after three months of decline. Price expectations rose for the third consecutive month, reaching their highest level since May 2022.
Despite a refinancing rate of 21% and business complaints, the Russian economy’s deceleration has been marginal. Military production remains a key support factor for industry. Across the broader economy, the Central Bank’s tightening measures have not significantly impacted corporate lending. According to the Central Bank, corporate loan portfolios grew by 1.9 trillion rubles in October, a 2.3% monthly increase (compared to 2% in September). Over a third of this growth stems from loans for investment projects, which will generate cash flows in the future. The Central Bank also highlighted large investment loans taken by petrochemical companies. Businesses appear to be borrowing in anticipation of budget disbursements, notes Olga Belenkaya, Head of Macroeconomic Analysis at Finam.
As we have previously noted, since August 2023, Russian authorities have pursued a ‘two tap’ policy: while the Central Bank seeks to cool the economy by tightening monetary policy, the government stimulates activity by channeling funds into military production through budget spending and subsidies (→ Re:Russia: The Two Tap Policy). This approach has successfully slowed consumer lending growth but left corporate lending unaffected.
Analysts at Raiffeisenbank assert that the economy is overheating. They expect the Central Bank to continue tightening monetary policy, especially given the recent acceleration in price growth. Weekly inflation data (0.5% from November 26 to December 2) points to an annualised rate of 8.8-10% for 2024, above the Central Bank’s forecast of 8-8.5%, according to the Telegram channel ‘Cold Calculation’. Another rate hike at the Central Bank's final meeting of the year seems likely.
Despite inflation risks, the steady growth in corporate lending suggests businesses are confident in government support. The Ministry of Industry and Trade recently stated that ‘additional measures to stimulate industrial investment activity will be necessary to maintain production growth in the short and medium term’. The Russian Union of Industrialists and Entrepreneurs has called for a reinstatement of 2022-style support measures, including investment incentives, working capital loans, and debt relief. President Vladimir Putin, speaking at the Russia Calling forum, hinted that such measures are forthcoming. He emphasised that curbing consumer credit while maintaining corporate lending growth is the intended policy outcome. However, this strategy does not effectively address inflationary pressures, posing a challenge to broader economic stabilisation efforts.