By Alexander Marrow
MOSCOW, December 8 (Reuters) – Russia’s success in avoiding a Western oil price cap is helping to drive a recovery in economic growth as President Vladimir Putin prepares to run for re-election, despite the problems caused by job shortages, inflation and high interest rates.
Russia’s parliament formally set a date for March 17. Putin, who said on Thursday that the economy is set to grow 3.5% this year, is widely expected to run for a new six-year term.
Russia’s $2.2 trillion export-focused economy has weathered the sanctions better than Moscow or the West anticipated as those who opposed the February 2022 invasion of Ukraine sought to punish and isolate Putin’s Russia.
Essentially, the West has not been able to effectively curb Russia’s oil revenue. Russia redirected exports to destinations such as China and India and used the opaque ownership of so-called shadow fleets of ships to avoid the western price limit.
With oil revenues recovering, Putin’s key domestic challenge will be battling a severe labor shortage, exacerbated by last year’s military mobilization and the emigration of hundreds of thousands of people since Russia invaded Ukraine.
Other economic issues, such as the weak ruble, high inflation and interest rates risk squeezing the purchasing power of families, a particularly sensitive issue as the country heads to the polls.
LACK OF SKILLED WORKERS
With unemployment at a record low of 2.9% and Moscow throwing fiscal resources at the defense sector through increased military production, other sectors such as IT are short of staff, hampering productivity.
Russia needs more skilled workers, managers and high-quality engineers to achieve the desired level of technological sovereignty in manufacturing industries, Putin’s economic adviser Maxim Oreshkin said in November.
“For people to come here more willingly, we need attractive wages,” Oreshkin said.
Short-term sanctions shocks have been overcome, Oreshkin said, but pressure from the West will only increase and the entire economy must work to transition to Russian technology platforms.
Labor force capacity has reached historically high levels, said Dmitry Kulikov, director of the ACRA rating agency.
“This means that economic growth will be limited on the supply side, as a result of which annual GDP growth rates will fall from around 3% in 2023 to closer to a possible 1-2%,” Kulikov said.
Significant wage jumps in manufacturing and the military, as well as fiscal support for families affected by the war and mobilization, are driving up wages.
After contracting in 2022, real incomes will recover sharply this year, but unevenly across sectors and regions, forcing many families reduceespecially on imported goods.
As Russia’s economy rebounds from a 2.1% contraction in 2022, the key question will be how the economy deals with overheating, with supply-side constraints likely to curb growth, said Liam Peach, senior emerging market economist at Capital Economics.
“Households have experienced a big increase in their incomes, but I don’t think it’s sustainable,” Peach said. “Higher inflation means greater pressure on household incomes ahead of the election.”
INFLATIONARY PRESSURE?
Keeping a lid on inflation is the job of the central bank. Already forced into 750 basis points of monetary tightening since July, the bank is widely expected to hike again, to 16%, on December 15. After double-digit inflation in 2022, inflation this year is seen around 7.5%, still good. above the bank’s 4% target.
“It is plausible that inflation reaches 10% next year because the economy is growing rapidly,” Peach said, pointing to wage pressures and unanchored domestic inflation expectations.
But in the end, the inflationary situation is manageable at the moment, especially with a population that has become accustomed to regular prices, albeit painful.
The central bank will of course talk cautiously about inflation, said Elina Ribakova, a senior fellow at the Peterson Institute for International Economics and the Kyiv School of Economics (KSE).
But the development of a serious inflationary spiral would require greater fiscal pressure, uncontrolled ruble depreciation and the central bank is behind the curve, she added.
“They’re nowhere near that, they just don’t feel the pressure,” Ribakova said.
Authorities have responded with tariffs and capital controls to the ruble’s fall beyond 100 to the dollar this year and sharp volatility is always a risk. It traded at 92.76 on Thursday.
While a relatively weak ruble is factored into Russia’s budget plans and boosts state spending through foreign currency export earnings, it raises import costs, fuels inflation and risks capital flight.
OIL PRICE COMFORT
Oil prices, the lifeblood of Russia’s economy, are currently well above what Russia needs for fiscal security, even if they slipped to five-month lows this week. LCOc1
A series of output cuts by OPEC+ countries and the widespread evasion of the West’s price cap are combining to boost Russia’s energy income.
“Fundamentally, the leverage of the price limit is increasingly under threat,” KSE Institute said in its November review, referring to the west of $60 per barrel. “In October, more than 99% of seaborne exports of Russian oil appear to be sold above $60/barrel.”
Western sanctions, designed to cut Moscow’s key source of funding, put a huge strain on Russia’s budget deficit earlier this year, but Moscow now expects a deficit of only about 1% of GDP.
“If the oil price stays at the current level, it is extraordinarily comfortable for Russia,” said Ribakova.
($1 = 92.3955 rubles)
(Reporting by Reuters in Moscow, Alexander Marrow in London; Editing by Elaine Hardcastle)
((alexander.marrow@thomsonreuters.com;))
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