In May 2022, the Russian economy contracted by 4.3% on an annual basis after a decline of 2.8% in April, according to a report by the Russian Ministry of Economic Development, quoted by Interfax on Thursday.
According to the report, the downward trend continued for the second month, in contrast to the first quarter, when the economy grew by 1.3% in March, by 4.1% in February, and 5.7% in January.
According to the results for January – May 2022, the ministry estimated GDP growth at 0.5% on an annual basis.
“The main factors behind the decline in GDP are transport and logistics constraints and reduced domestic demand,” the report said.
The most affected by the contraction are wholesale (minus 15.5% on an annual basis in May) and transport – minus 1.8%.
“The situation between the sectors remains uneven: the production of the machine-building complex in May fell by 6.5% on an annual basis, while the decline in the automotive industry accelerated to 66% on an annual basis in May, and in electronics, on the contrary, growth accelerated. to 36.2% on an annual basis in May. There is a positive trend in pharmaceuticals – an increase of 29.4%, production of construction materials – by 2.6% on an annual basis, “the report said.
According to the ministry, consumer activity has stabilized at low levels, with the total turnover of retail trade, catering, and paid services for the population in May decreasing by 7.5%.
The dark side of the strong ruble
The ruble is as strong as it has not been in years – despite sanctions imposed by the West. But the exchange rate hides the problems of the Russian economy and could be fatal for the country, Deutsche Welle reports.
More and more positive financial news is coming from Russia. The leading interest rate is again at pre-war levels. Inflation is subdued, and the ruble is as strong as it has not been for five years. According to estimates by the British “Economist”, Russia could achieve a trade surplus of $ 250 billion.
All of this could give the impression that sanctions are not being reflected in the way the West expected. But experts warn against jumping to conclusions. “The central bank did deal with the great difficulties professionally after the start of the war,” said economics professor Natalia Subarevich. But great challenges lie ahead for Russia.
Imports fell sharply
Russian authorities are trying to highlight these indicators, which are useful to them, Subarevich notes. “Yes, indeed, for three weeks, inflation was zero.” But this is due to declining demand from the population. So it would be most accurate to say – we do not have inflation, we even have deflation, but this is because people have just stopped buying.
Subarctic also points out that only a few have been able to predict the huge rise in energy prices. “This has led to a huge inflow of currency into the country, given that imports have fallen sharply.” This in turn will be the reason for the expected trade surplus of $ 250 billion.
While gas and oil can be exported at a high price, sanctions can cost Russia almost nothing. That is, she takes more than she can give. Thus, the trade surplus could be twice as high this year as last.
But it is precisely these imports that are sorely needed. There are no components and spare parts in mechanical engineering, transport, or energy. Production is stagnant, the economy is stagnating, Subarevic said.
Gazprom recently justified the shrinking gas supplies to Germany with a shortage of spare parts. According to the accusations of the Russian gas concern Siemens, it did not send back to Russia a compressor installation repaired abroad. Siemens said it could not deliver the plant because of the sanctions.
Added to all this is the fact that many Russians are unemployed – although on paper they continue to receive part of their pay. This is not reflected in the statistics, Subarevic explains.
Thus, in the end, the strong ruble could have a fatal impact on the “champion of exports” Russia. Because it makes it more expensive. In addition, the ruble is not convertible, says the economics professor.
The value of the ruble is maintained artificially
Economist Sergei Suvorov also warns that the ruble’s exchange rate is not market-driven. Meanwhile, the value of the ruble is completely detached from the economic situation, Suvorov said. According to the Russian Central Bank, the gross domestic product could fall by ten percent this year, and the value of the ruble should depend on it. That is, it is maintained strong artificially.
The expert could not say what the real value of the ruble was. Only one thing is clear: if the ruble was not so strong, inflation would be twice as high – 30-40 percent.
Thousands of millionaires are trying to leave Russia
Thousands of millionaires are trying to leave Russia, and the continued exodus of its business and oligarchic community is likely to exacerbate the long-term damage of the war to its economy, the British Ministry of Defense said on Friday, quoted by Reuters.
“Migration applications suggest that 15,000 Russian millionaires are probably already trying to leave (the country),” the ministry said in its daily summary of the war in Ukraine, which is based on British intelligence.
Meanwhile, the ruble has depreciated against the dollar and the euro amid statements by Russian authorities at the International Economic Forum in St. Petersburg, also known as the Russian Davos.
Retrospective commissions
Russia’s Interfax news agency reports that Moscow intends to allow Russian banks to charge commissions on foreign currency deposits retrospectively.
The central bank noted that due to the isolation of the foreign exchange market, the presence of foreign currency liabilities and assets creates additional risks, as they are deprived of the opportunity to hedge their foreign exchange position. To accelerate the depreciation of the economy’s assets and liabilities, the Central Bank has proposed allowing banks to set negative interest rates on foreign currency deposits of legal entities.
According to an Interfax source, the Ministry of Economic Development is now ready with a bill that is being agreed upon between the departments before being submitted to parliament.
The amendments allow banks to charge commissions on corporate deposits if provided for in the agreement. The amount of the remuneration may exceed the amount of the interest on the amount of the deposit paid by the bank under the contract.
Russia’s economy suffers from “Dutch disease”
The developing situation in the Russian economy is filled with a new recurrence of the “Dutch disease”, warned Russian Finance Minister Anton Siluanov in St. Petersburg. The symptoms of the “Dutch disease” are a slowdown or cessation of growth in the manufacturing industry, provoked by the strengthening of the national currency against the background of high revenues from exports of raw materials and increased imports.
The cure for this disease, Siluanov noted, is that the costs do not depend entirely on revenues from the sale of fossil fuels, “because we now spend all revenues from oil and gas on costs.” According to the Minister, Russia should give up this comfort, because then the costs will depend on payments determined by foreign countries and the volume of raw materials sold abroad.
Meanwhile, the Ministry of Economic Development and the Central Bank of the Russian Federation differed radically in their assessments of the risks of deflation in Russia.
“So far we are not talking about the risk of deflation. So far we have a 16.7% increase in prices on an annual basis and space for calibration of monetary policy through standard measures, namely through the key interest rate mechanism, as long as it remains significant,” said Alexei Zabotkin. – Chairman of the Bank of Russia at the forum in St. Petersburg.
The Ministry of Economic Development strongly disagrees with this assessment, Interfax writes, quoting Minister Maxim Reshetnikov.
“We have deflation for the fifth week in a row, colleagues, and there is no need to measure inflation year after year. Let’s take monthly data, May inflation, recalculated at an annual rate – 1.6% inflation,” the minister said, warning that without taking cheap loans. we will not be able to get out of the situation.”
