“Shaky balance”, i.e. the exhaustion of old growth incentives of the Russian economy with unclear prospects for new ones – experts

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This material was produced in Russia, where it is prohibited by law to cover the special military operation of the Russian Federation in Ukraine

MOSCOW, May 26 (Reuters) – The growth stimulus to the Russian economy that saved it from a sharp collapse last year is running out and it is not yet clear if new ones will kick in due to internal and external constraints, experts from the Center for Macroeconomic Analysis and Forecasts Short Term (CMASF).

The former stimulus that allowed the Russian economy to survive relatively well, compared with initial forecasts, the massive sanctions of the West in connection with Moscow’s “special operation” in Ukraine, experts attributed the expansion of state defense procurement, the substitution of cheap imports, the budgetary financing of consumption by low-income segments of the population and construction projects.

“The factors that ensured economic growth last year – a sharp increase in construction, including in the “new regions”, an increase in military production, “cheap import substitution” in some markets – have already been exhausted, the CMASF analytical report led by Dmitry Belousov reads .

Thus, the construction of apartment buildings in large cities, the development of transport and logistics infrastructure, including in new areas of foreign trade, the reconstruction of devastated cities in Donbass and the construction of military facilities were the most important factors supporting the investment. process, experts wrote.

However, construction is currently reaching its limits of growth, e.g. due to budgetary tensions and limited demand for housing from the population in crisis, which may significantly slow down the investment dynamics, they say.

CMASF experts called the current situation in the Russian economy an “unstable balance”, noting that it is too early to talk about a “growth mechanism”.

Starting growth requires the involvement of new factors – private investment in machinery and equipment and the expansion of exports of goods – experts assess.

Meanwhile, commodity exports, both in value and in physical terms, continue to fall – and at an accelerated rate, they note.

The situation is complicated by the uncertainty of the global situation and the risk of a global crisis that may appear already in the second half of this year.

“If this crisis materializes, there may be an additional impetus to reduce demand for Russian exports, even from countries friendly to Russia,” the report reads.

When it comes to investments, CMASF experts point out three systemic limitations to creating a full investment cycle.

High levels of uncertainty coupled with high interest rates encourage companies to hold funds in accounts rather than invest them.

The shortage of labor caused by partial mobilization and emigration of able-bodied citizens, and as a result accelerated wage growth, leads to a gradual decrease in gross profit – the main resource of private investment in fixed assets.

There is still a physical deficit of investment funds – production equipment from “unfriendly” countries, certain types of raw materials and components.

At the same time, the ability of the federal budget to increase public investment is also limited due to the need to balance other budgets with the budget system, experts write.

“If nothing happens with the launch of investments, then depending on the success of the policy of promoting Russian goods for export, GDP growth may range from 0.5% to slightly more than 1.0%,” experts predict.

The Ministry of Economy predicts that the economy will grow by at least 1.2% in 2023 and accelerate the growth rate to 2.0% in 2024 and 2.6% in 2025.

The introduction of new sanctions, including “price ceilings”, and Russia’s reaction to them in the form of refusal to send energy carriers to the countries that initiated them, at least increased the risk of destabilizing the trade balance, CMASF experts wrote.

In their opinion, the temporary system of disinflation factors, which include the strengthening of the ruble as a result of falling imports, the decline in world prices of agricultural commodities, the emergence of surpluses of previously imported commodities on the domestic market, may be exhausted in the near future, which requires special attention to inflation and its factors.

(Daria Korsunska)