Analysis: Russians feel no economic pain now, bleak long-term prospects

  • Government backs temporary relief from sanctions
  • Minister sees ‘demand crisis’ as spending plummets
  • Military operations in Ukraine require ‘tremendous resources’
  • Economists see gloomy long-term outlook for Russia’s economy

LONDON, May 30 (Reuters) – For Oleg Kechin, the owner of a chain of barbershops, his prediction that Russia will plunge into its worst economic crisis in a generation feels overdone.

U.S. President Joe Biden may have promised that Western sanctions would wreak economic havoc on Russia, but Kachin’s business is still attracting customers in the town of Saransk, 510 kilometers (320 miles) southeast of Moscow.

“There is no serious crisis. In general, everything is fine,” he said. “Everyone was talking about a drop in purchasing power, but I didn’t notice it.”

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However, if certain indicators are to be believed, that confidence may not be entirely correct. Trade with the outside world has plummeted, consumers are reluctant to spend, and rising prices for basic goods are starting to squeeze household budgets.

Russian officials insist the economy remains stable. The central bank on Thursday cut interest rates by 3 percentage points to 11% and is expected to cut its inflation forecast for this year from the current 18-23%.

The ruble has risen to around 66 against the dollar under capital controls and orders for exporters to sell half of their hard currency earnings, stronger than before Russia sent its armed forces to Ukraine on February 24.

Russian President Vladimir Putin has welcomed the departure of foreign companies selling or dumping Russian assets, saying Russia cannot be cut off from global trade.

But not everyone is convinced the economy will come out unscathed. Roman, a 25-year-old Muscovite who asked not to be given his full name, said life in the middle class was not “much different” than before, but he saw worrying signs.

“One of the things that bothers me is … the prices of everyday items and even vegetables keep going up. I think that shows that the worst is yet to come,” he said. “The labor market situation in my field doesn’t make me very optimistic either.”

“Demand Crisis”

Some indicators bear out his concerns. Kommersant, citing preliminary data from the Ministry of Finance, said VAT revenue, which reflects consumer spending, fell 54% year-on-year in April.

Economy Minister Maxim Reshetnikov said on Friday there was a “demand crisis” in business and consumer spending.

Russia has stopped publishing most money-flow data, but figures compiled by the Bank of Finland based on local customs data show a sharp drop in imports — not just from the West.

China’s exports to Russia fell by a quarter in April, while exports to Vietnam, South Korea, Malaysia and Taiwan more than halved, the bank said.

The economy minister said manufacturers were rebuilding supply chains devastated by sanctions and said 2,000 “backbone companies” had access to a concessional loan scheme.

But inflation remains at a 20-year high of more than 17%. That means that Putin’s announced 10 percent increase in pensions and the minimum wage still leaves many people facing cuts to their households’ real income.

Rising prices may not be Russia’s biggest problem. A strong rouble has slashed weekly inflation, but it cannot defend against a broader threat to economic output from Russia’s growing isolation.

“There are concerns that we could be in a deflationary spiral, when less money in the economy leads to less production, lower prices and so on,” Reshetnikov said.

At the same time, funding Ukraine’s military operations will put pressure on the budget. Finance Minister Anton Siluanov said on Friday that Moscow needed “enormous financial resources” to carry out what Moscow called “special military operations.”read more

Stimulate

Russia has tapped its state wealth fund, which has about $110 billion in liquid assets, which has grown 22 percent this year, to support spending, the economy minister said.

The finance minister said Moscow had earmarked an 8 trillion rouble ($123 billion) stimulus package for the “current situation”, but it was unclear how much of that was new money and for what period.

From automakers to banks, the full impact of the withdrawal of Western companies on economic output and employment has yet to be seen.

Sergey Guriyev, a professor of economics at Sciences Po in France, expects the impact to be more pronounced in the coming months.

“The real pain has not yet begun, as some of the companies that exited are still paying wages and some companies continue to use their inventories of imported parts for production,” said Guriyev, who is also a former chief economist at the European Bank for Reconstruction and Development.

Economists at Morgan Stanley expect household consumption to fall by 13% in 2022 and investment to fall by 23%. Russia’s potential long-term growth rate is now just 1 percent, the bank’s chief regional economist, Alina Slyusarchuk, said in a note.

For smaller Russian companies, the outlook appears to be dimming, and while so little official data has been released so far that companies are no longer required to report performance, there is little way to measure it accurately.

“Few companies these days want to strategize or plan long-term, large-scale contracts,” said Anastasia Kiseleva, a partner at a small public relations firm in Moscow.

“Businesses – especially small ones – will be engaged in pure survival rather than developing or creating anything new.”

However, survival mode is nothing new for many Russians, who have endured several deep crises since the collapse of the Soviet Union in 1991.

“The worst is ahead of us,” said Yevgeny Sheremetov, who runs a tour company near Lake Baikal in Siberia. “But the inhabitants of this country are used to hardship. I have my summer house, potatoes and cucumbers. After the 1990s, nothing scare me.”

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Additional reporting by Marc Jones in London; Editing by Kevin Liffey and Edmund Blair

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