There’s reason for optimism, but Moscow’s prospects aren’t as rosy as it says they are says Ekaterina Zolotova.
The World Bank has published a forecast for Russian economic growth in 2023, and the results aren’t pretty. According to its calculations, Russia’s gross domestic product in 2023 is expected to decline again by 3.3 percent thanks to the full implementation of an EU oil embargo, and to Moscow’s declining natural gas exports to Europe.
But Moscow is more optimistic than the World Bank. The government considers its current plight a period of adaptation to unique challenges rather than a total disaster. Partly this is because it believes 2023 may be easier on the economy overall, with a less than 1 percent contraction, according to the Ministry of Economic Development.
The question, then, is: Who is right? Is Moscow naive? Is it fudging its numbers? Or does it really have a larger safety net than the West believes? The answer matters because the Kremlin’s foreign policy decisions – such as how to conduct the war in Ukraine – will depend heavily on how its economy fares. Poor economic activity and social instability will require more financial influence and assistance from the state since many sectors depend on government payments.
According to Rosstat, about 33 percent of the Russian population, excluding state employees, receives social benefits from the state. This creates a direct line between poor economic performance and potential instability. On the other hand, if the economy survives the sanctions and logistical difficulties arrayed against it, then the West will have to explore new ways to weaken Russia. In time, it may even think about how to start negotiations and seek compromises on the war in Ukraine.
Regardless of the actual state of the economy, the Kremlin will therefore want to demonstrate to the West and to its people that its economy can survive despite its alienation and its hardship. Its negotiating position on Ukraine depends on it.
Indeed, over the past six months, Moscow has begun to demonstrate that the Russian economy can do without the U.S. and Europe. European sanctions and restrictions hurt the financial sector, the market for components and semi-finished products, logistics and the consumer goods market. Russia adapted in a variety of creative ways, including by redirecting part of the flow of oil and gas to the east and by creating parallel imports that allow companies to keep their shelves stocked and gain access to the necessary components.
More, the departure of some foreign companies allowed domestic industries to develop in their place. The growth in the use of national currencies in settlements made it possible to ease the dependence on the U.S. dollar in trade transactions. Import substitution has been notably successful in the textile, service and food industries. Most important, the price of resources such as oil and gas stayed high, which allowed Moscow to survive lower levels of overall export.
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Ekaterina Zolotova is an analyst for Geopolitical Futures. Prior to Geopolitical Futures, Ms. Zolotova participated in several research projects devoted to problems and prospects of Russia’s integration into the world economy. Ms. Zolotova has a specialist degree in international economic relations from Plekhanov Russian University of Economics. In addition, Ms. Zolotova studied international trade and international integration processes. Her thesis was on features of economic development of Venezuela. She speaks native Russian and is fluent in English.