© Reuters. FILE PHOTO: A general view of the Kyiv train station and the skyscrapers of the Moskva City business center in Moscow, Russia, April 29, 2022. REUTERS/Maxim Shemetov/File Photo
Written by Jake Cordell
LONDON (Reuters) – Expectations that Russia will plunge into its deepest economic crisis in a generation seem exaggerated, says Oleg Kitchin, owner of a chain of barbershops.
US President Joe Biden may have promised Western sanctions that would wreak economic havoc in Russia, but Kitchen Store still attracts customers to Saransk, 510 kilometers (320 miles) southeast of Moscow.
There is no deep crisis. In general, everything is fine. ” Everyone talks about a decrease in purchasing power, but I did not notice it.
However, this confidence may not be entirely accurate if some of the indicators are to be believed. Trade with the outside world has collapsed, consumers are becoming reluctant to spend, and rising commodity prices are beginning to affect household budgets.
Russian officials insist the economy is faltering. The central bank cut interest rates by three percentage points to 11% on Thursday and is expected to cut its inflation forecast for this year from the current forecast of 18-23%.
Amid capital controls and orders for exporters to sell half of their hard currency earnings, the ruble has appreciated and, at about 66 against the US dollar, is stronger than it was before Russia sent its troops into Ukraine on February 24. [RU/RUB]
President Vladimir Putin, who has welcomed the exit of foreign companies that simply sold or disposed of Russian assets, said that Russia cannot be isolated from global trade.
But not everyone is convinced that the economy will get away with harm. Roman, a 25-year-old Muscovite who asked that his full name not be used, said middle-class life is not “drastically different” than before, but he sees worrying signs.
“The only thing that bothers me… is the constant rise in the prices of basic necessities and even vegetables. I think this indicates that the worst is yet to come.” “The labor market situation in my area does not make me optimistic either.”
Some indicators justify his fears. The daily Kommersant, citing preliminary data from the Treasury, said receipts for value-added tax, which reflects consumer spending, fell by 54% year-on-year in April.
Economy Minister Maxim Reshetnikov said on Friday that there was a “demand crunch” in business and consumer spending.
Russia has stopped publishing most data on financial flows, but figures compiled by the Bank of Finland based on domestic customs data show a collapse in imports – and not just from the West.
Chinese exports to Russia fell by a quarter in April, and shipments from Vietnam, South Korea, Malaysia and Taiwan fell by more than half, the bank said.
The business secretary said manufacturers are restoring supply chains that have been disrupted by sanctions, and he said Alfei “essential companies” have access to concessional credit schemes.
But inflation is still above 17%, the highest in two decades. This means that the 10% increase in pensions and the minimum wage announced by Putin means that many still face a real reduction in family income.
High prices may not be the biggest problem facing Russia. The already strong ruble has caused weekly inflation to fall sharply, but it will not prevent a broader threat to economic output from Russia’s growing isolation.
Reshetnikov said there were “concerns that if less money in the economy leads to lower production, lower prices, and so on, we might get into a deflationary spiral.”
Meanwhile, financing a military campaign in Ukraine will put pressure on the budget. Finance Minister Anton Siluanov said Friday that Moscow needs “huge financial resources” for what Moscow calls its “special military operation.”
Russia has already rushed to the National Wealth Fund, which holds about $110 billion in liquid assets, to support spending, which is up 22% this year, Russia’s economy minister said.
The finance minister said Moscow has 8 trillion rubles ($123 billion).
The full impact on economic output and jobs from the withdrawal of Western companies, from automakers to banks, is not yet clear.
Sergey Gurev, professor of economics at the French Institute of Political Science, expects the impact to be more severe in the coming months.
“The real pain has yet to start because some of the outbound companies are still paying wages and some companies continue to produce with their stocks of imported parts,” said Gurev, who is also a former chief economist at the European Bank for Reconstruction and Development.
Morgan Stanley (NYSE: 🙂 Economists see household consumption fall 13% and investment fall 23% in 2022. The bank’s chief regional economist Alina Slyusarchuk said in a note that Russia’s potential long-term growth rate is now only 1%.
The outlook for smaller Russian companies appears murky, although there is little way to measure this with so little official data being released and companies no longer required to report results.
“Very few companies are now willing to develop a strategy or plan long-term, large-scale contracts,” said Anastasia Kiseleva, a partner at a small PR firm in Moscow.
“Companies – especially small ones – will be interested in just surviving, not developing or creating something new.”
However, survival status is nothing new for many Russians, who have experienced several deep crises since the collapse of the Soviet Union in 1991.
“The worst is yet to come,” said Yevgeny Sheremetov, who runs a travel company near Lake Baikal in Siberia. But the people of this country are accustomed to difficulties. I have my summer house with potatoes and cucumbers. Nothing can scare me after the ’90s.”