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The ministry improved expectations for the economic downturn this year, but worsened the forecast for 2023.

The Russian economy will shrink for two years in a row against the backdrop of large-scale sanctions: this year the decline will be 7.8%, the next - 0.7%. Inflation in annual terms will be at the level of 17.5% by the end of 2022. Such data are provided in the updated scenario conditions for the development of the economy for 2023 and the planned 2024–2025. The Ministry of Economic Development has already submitted the document to the government, a spokesman for the ministry told reporters. The scenario conditions have been agreed with the Ministry of Finance and the Ministry of Energy and will soon be sent to the regions for budgeting. Russia's GDP, according to the updated forecast, will decline this year less than the previous version - by 7.8% instead of 8.8%. This is the strongest drop in the index since the global financial crisis in 2009. According to a ministry spokesman, the decline will peak in the fourth quarter of this year, and not in the third, as previously thought. In 2023, the economy will continue to decline and contract by 0.7% (instead of growing by 1.3%). In 2024, according to the forecast, Russia's GDP will grow by 3.2%, in 2025 - by 2.6%.

Even in the short term, the uncertainty is quite high: this is the continuation of sanctions pressure, the implementation of already adopted restrictions, which are often delayed, problems with logistics, says a representative of the ministry. “In the coming months, the situation in the economy will be determined primarily by our foreign trade balance. For the first time in modern history, we are entering a recession with high commodity prices,” the source said. The recession will not be as sharp as expected, he notes, however, in April-May, risks of a cyclical economic crisis began to be observed. The main contribution to the decline in GDP this year will be made by consumption, the representative of the ministry added.

The improvement in the forecast compared to the previous version may be due to the release of operational statistics, which indicate that the expected economic downturn has not yet begun, said Sofya Donets, an economist at Renaissance Capital for Russia and the CIS. There are positive prerequisites that indicate that the situation may turn out better than the Ministry of Economics expected: inflation is slowing down faster than expected, the strengthening of the ruble may support the purchasing power of the population and investments within the country. Much will depend on the dynamics of exports and the decisions of the European Commission on the trade embargo, the expert believes.

The consequences of the imposition of sanctions, which were felt very strongly in March, have now softened: this is evidenced by the situation in the foreign exchange market and the situation with the replenishment of counters, says Anton Tabakh, chief economist at Expert RA. At the same time, a significant part of this blow will be stretched out in time, the expert believes: it was expected that the economy would react quickly and painfully, but it turned out that the effects would stretch.

If the economy has time to structurally reorganize by 2024, then there are grounds that the GDP growth rate will reach the values predicted by the Ministry of Economics in 2024-25, believes Alexander Isakov, the author of the Solid Numbers telegram channel. To do this, it is necessary to establish a trading system, increase trade turnover with new partners, especially with Asian ones, establish logistics chains, and replace falling investment imports with domestic production.

The ministry also adjusted its end-of-year inflation estimate to 17.5% from 20.7% in the preliminary version. According to the representative of the ministry, inflation in annual terms is already at its peak, but during the year the surge in prices may repeat. According to the forecast, by the end of 2023, inflation will grow by 6.1%, and will return to the Central Bank's target of 4% only in 2024.

May's weekly inflation data shows that the current seasonally adjusted inflation rate has already slowed to 11% on an annualized basis, Isakov said. If the slowdown continues further, then inflation by the end of the year will indeed be 17-17.5% (year to year), he believes.

The price of Urals oil, as well as the exchange rate of the ruble, has been adjusted downwards under the updated scenario conditions. “Vedomosti” (newspaper) wrote that these two parameters were the main reason for the discrepancy between the estimates of the Ministry of Economics and the Ministry of Finance. Thus, the price of oil this year will be at the level of $80.1 per barrel at the exchange rate of 76.7 rubles. per dollar, in 2023 - $71.4 per barrel at a rate of 77 rubles. per dollar. In 2024-2025 the price of Urals will continue to decline (to $66 and $61.2 per barrel, respectively), while the dollar exchange rate will continue to grow (78.7 rubles per dollar, 81 rubles per dollar).

The ruble exchange rate forecast has been adjusted to the spot price, which reflects the relative stability of exports and the reduction in imports, experts believe. According to this evaluation, the average exchange rate for 2022 will be at the level of 75 rubles / dollar.

Investments in fixed assets, according to the scenario conditions, will fall by 19.4% in 2022, and will stagnate next year (growth by 0.3%). In 2024-2025 capital investments will increase by 8.9% and 5.3% respectively.

Exports of goods in real terms will decrease this year by 14% by 2021, while oil and gas exports - by 8%, non-oil and gas - by 20%, a representative of the Ministry of Economics said. Exports of goods from Russia in monetary terms are forecasted to decline by 2.4% in 2022 compared to 2021 to $482.4 billion.

Imports of goods will fall by 27% in real terms due to logistics and contraction of domestic demand, while in nominal terms - by 17%, taking into account global inflation and an increase in logical margins, that is, "new import channels will cost us more", said the representative of the Ministry of Economy. In monetary terms, the indicator will decrease to $251.9 billion. Thus, the current account surplus this year will be at a historic high of $190.8 billion.

In 2023, exports will amount to $451.6 billion, imports - $275 billion. In 2024, exports will be approximately at the same level - $450.4 billion, imports will grow to $299.5 billion.

Indeed, exports in nominal terms this year may not decline as much as in real terms, says Sofia Donets: the dynamics of supply volumes will depend on whether the EU introduces an oil embargo or not. High prices now compensate for the fall in real exports, the expert emphasizes. According to her, a record high current account surplus, which will be formed at the end of this year, means that support for the ruble will be high. The ruble by the end of the year may weaken to 85 rubles. per dollar if the EU imposes a trade embargo. If this does not happen, then it may remain in the range of 60-70 rubles. per dollar.

The trade balance surplus in January-April hit a new all-time high and amounted to $106.5 billion,  Alexander Isakov recalls. At the same time, detailed trade data is no longer published by the Bank of Russia. “But to get a trade surplus of this magnitude, according to our estimates, imports had to be reduced by 60-70%,” the expert notes. Investment in fixed assets correlates with import dynamics, as the share of machinery in the value of imports is about half, he says.

Source: https://www.vedomosti.ru/economics/articles/2022/05/17/922432-spad-ekonomiki-sanktsii?utm_campaign=newspaper_18_5_2022&utm_medium=email&utm_source=vedomosti