'Slower burn.' Russia dodges economic collapse but the decline has started
The latest on Russia's economy as Putin tries to deal with inflationReplayMore Videos ...
The latest on Russia's economy as Putin tries to deal with inflation 01:47London (CNN Business)Six months after invading Ukraine, Russia is bogged down in a war of attrition it didn't anticipate but it is having success on another front — its oil-dependent economy is in a deep recession but proving far more resilient than expected.
"I'm driving through Moscow and the same traffic jams are there as before," says Andrey Nechaev, who was Russia's economy minister in the early 1990s. The readiness of China and India to snap up cheap Russian oil has helped, but Nechaev and other analysts say Russia's economy has started to decline and is likely facing a prolonged period of stagnation as a consequence of Western sanctions. On the surface, not much has changed, bar a few empty storefronts that once housed Western brands that have fled the country in their hundreds. McDonalds (MCD) is now called "Vkusno i tochka", or "Tasty, and that's it" and Starbucks (SBUX) cafes are now gradually reopening under the barely disguised brand Stars Coffee.The streets of Moscow are as busy as ever. The exodus of Western businesses, and wave after wave of punishing Western sanctions targeting Russia's vital energy exports and its financial system, are having an impact, but not in the way many had expected. Read MoreNechaev, who presided over some of Russia's most turbulent economic times and helped steer its transition to a market economy, credits some of this to the central bank.The ruble did crash to a record low to the US dollar earlier this year in the wake of the invasion as the West froze about half of Russia's $600 billion foreign currency reserves. But it's bounced back since to its strongest level against the US dollar since 2018. (Remember President Joe Biden's threat of reducing it to "rubble"?) That's largely the result of aggressive capital controls and rate hikes back in the spring, much of which have now been reversed. Interest rates are now lower than before the war, and the central bank says inflation, which peaked at almost 18% in April, is slowing and will be between 12% and 15% for the full year.The central bank has also revised up its GDP forecast for the year, and now expects it to shrink by 4% to 6%. In April, the forecast was for an 8% to 10% contraction. The International Monetary Fund also now predicts a 6% contraction.Moscow had been trying to build a 'fortress economy' since annexing Crimea in 2014.It helped that the Kremlin had eight years to prepare, spurred by the sanctions the West imposed after Moscow annexed Crimea in 2014."The exit of Mastercard, Visa, it barely had an impact on domestic payments because the central bank had its own alternative system of payments," says Nechaev.Russia set up the Mir credit card, and its own transaction processing system in 2017. And there's a reason Russian fans of McDonalds and Starbucks are still able to get their fast-food fix, says Chris Weafer, founding partner of Macro Advisory Ltd, a consultancy advising multinational businesses in Russia and Eurasia. Since 2014, many Western brands in Russia caved to government pressure and localized some or all of their supply chains. So when these companies left, it was relatively easy for Russian buyers to buy them and keep running them simply by changing the wrapper and packaging. "Same people, same products, same supply," says Weafer. It's not an entirely watertight strategy, though.The re-branded McDonald's stores reported a shortage of French fries in mid-July, when Russia's potato harvest fell short, and foreign suppliers wouldn't fill the gap due to sanctions.Can Russia's energy boom continue?Fast food continuity is one thing. Russia's longer term stability rests on its energy sector, still by far the biggest source of government revenues. To say high energy prices have so far insulated Russia would be an understatement. The International Energy Agency says Russia's revenues from selling oil and gas to Europe doubled between March and July this year, compared to an average of recent years. That's despite declining volumes. IEA data shows gas deliveries to Europe are down by about 75% over the past 12 months. Oil is a different matter. The IEA's March prediction that 3 million barrels a day of Russian oil would come off the market from April because of sanctions, or the threat of them, has not materialized. Exports have held up, though Rystad Energy analysts note a slight drop over the summer.The major factor has been Russia's ability to find new markets in Asia. According to Houmayoun Falakshali from commodities consultancy Kpler, most of Russia's seaborne oil exports have gone to Asia since the start of the war. In July, the share was 56%, compared to just 37% in July 2021.Russian seaborne oil exports to Asia have soared this year. Between January and July this year, China increased its seaborne imports of heavily-discounted Russian Urals crude by 40%, compared to the same period last year, according to Kpler data. That's despite China's initial efforts to avoid the appearance of taking sides in Russia's war on Ukraine. India's seaborne imports from Russia are up more than 1,700% over the same period, according to Kpler. Russia has also been increasing gas exports to China through a Siberian pipeline.What happens when Europe's embargo on 90% of Russian oil comes into force in December, will be critical. An estimated 2 million barrels a day of Russian oil will be in limbo, and while it's likely some of that will go to Asia, experts doubt whether demand will be high enough to absorb it all. Russia is burning off millions of dollars in gas every day. Here's whyFalakshali says China cannot buy much more Russian oil than it already is, because of a domestic slowdown in demand, and because it simply doesn't need much more of the specific type of oil Russia exports. Price will play a critical role, too, in whether Russia can afford to keep discounting to secure new markets. "A discount of 30% from $120 a barrel is one thing," Nechaev points out. "A discount from $70 is another matter."'Slower burn' While global inflation is helping Russia's energy sector, it's hurting its people. Much like the rest of Europe, Russians are already suffering a cost of living crisis, made much worse by the war in Ukraine.Nechaev, who helped steer Russia through a much more dramatic economic collapse in the 1990s, is worried. "In terms of the standard of living, if you measure it by real incomes, we have gone backwards by about 10 years," he says.The Russian government is spending to try to combat this. In May, it announced it would raise pensions and the minimum wage by 10%. It's set up a system where employees of companies that have "suspended their activities" can temporarily transfer to another employer without breaking their employment contract. And it's spending 17 billion rubles ($280 million) buying the bonds of Russian airlines, crippled by airspace bans and sanctions preventing maintenance and the supply of parts by foreign manufacturers. It's technology sanctions, like those affecting the airline industry that may have the most profound impact on Russia's long-term economic prospects. In June, US commerce secretary Gina Raimondo said global semiconductor exports to Russia had collapsed by 90% since the war started. That is crippling production of everything from cars to computers, and will, experts say, put it further behind in the global technology race."The impact of sanctions will be more a slower burn rather than a quick hit," says Weafer. "Russia is now looking at potentially a long period of stagnation."Nechaev is even more definitive. "Right now, the economic decline has started," he says.Click Here To Get Funded!