How Russia coped with the shock

After the start of Russia’s invasion of Ukraine, the International Monetary Fund, the World Bank, and the Russian Central Bank were all expecting the country’s GDP to decline by 8 to 11%.

In the spring, the economic situation was exactly as predicted. The official exchange rate dropped to a record of 115 rubles for 1 US dollar, while foreign currencies were sold at even bigger rates in banks. Russia’s stock market was going through the biggest decline since 1998 when Russia defaulted on its debt. Inflation spiked to 18%, a record high over the past 20 years.

In response, the Central Bank took emergency measures: it raised the key rate from 9.5% to 20%, limited the purchase and transfer of foreign currency abroad, and banned non-residents from selling their securities.

Soon, the ruble began to recover from the fall, and inflation slowed down. Oddly enough, it was the Western sanctions policy that caused this, in addition to the efforts made by technocrats from Russia’s government and the Central Bank. The financial restrictions that were introduced almost immediately after the start of the war reduced the opportunities for capital outflow from Russia and thus helped stabilise the country’s banking system.

At the same time, the ban on importing oil from Russia came into force only nine months later. During this period, Russia managed to earn a record profit. Oil and gas exports increased by 40% to $345 billion in monetary terms. All of this allowed the Russian authorities to increase the federal budget expenditures by a quarter, and this additional money was largely used for warfare purposes.

As a result, Russia’s Federal Statistics Service (Rosstat) was able to report a “much softer landing”: inflation was 11.9% at the end of 2022, the real income of the population decreased by 1% (adjusted for inflation), and the unemployment rate dropped to a record low of 3.7%.

The annual GDP decline was only 2.1%. In comparison, it dropped by 2.7% during the 2020 lockdown, by 2.8% in 2015, and by 7.9% in 2009 due to the global financial crisis.

Tank economy 

However, GDP is not the best indicator during a war. First, Rosstat figures cannot be fully relied upon, as the agency is used to changing its methodology every now and then and to revise past results so as to show better figures, says Ivan Fedyakov, CEO of the INFOLine think tank. Rosstat published its “optimistic” annual assessment the day before Vladimir Putin’s address to the Russian parliament.

Second, the very structure of Russia’s economy has changed significantly after a year of war. While civilian industries are falling by dozens of percent, weapons production is growing in Russia, which affects its GDP.

For instance, the production of ready-made metal products, which includes ammunition, increased by 7%.

“The production of cars that people used to happily buy was replaced by the production of ammunition, disguised by the ‘metal products’ label. This is a fundamentally different GDP,” says Oleg Buklemishev, Director of the Centre for Economic Policy Research at the Faculty of Economics in the Moscow State University.

The production of passenger cars decreased by 67% in the past year, and by 44.6% for all vehicles, including trucks and buses. Fedyakov says the situation in the car market is a disaster:

“We dropped to the 1980s level.”

Car sales decreased by 58.8% to 687,000 units over the year.

Meanwhile, Russians are in no hurry to switch to the available Chinese brands: sales of key manufacturers from China grew by less than 5%. According to the forecast of analysts at the Technologies of Trust company (formerly PwC in Russia), the car market will only reach pre-crisis levels by 2027.

A similar collapse occurred in the production of washing machines (-49.2%), refrigerators (-42.2%), and other household appliances.

The statistics related to final consumption look just as bleak. According to Rosstat, the retail trade turnover in physical terms fell by 6.7% in 2022, by 9.5% in Q4,2022 compared to Q4,2021, and non-food retail, where the share of imports is high, decreased by 14.3%.

For instance, Russia’s clothing spending fell by 6.6% in 2022 adjusted for inflation, although the first three months showed active growth. Furniture sales fell by 19.8%, mobile phones sales by 27.5%, refrigerators sales by 14.6%, and sales of washing machines by 18.4%.

Sales of smartphones declined for the first time in Russia’s history: this market was growing even during the pandemic, Fedyakov notes. M.Video-Eldorado, Russia’s largest seller of electronics and household appliances, estimates a decline in sales of smartphones by 20% down to 24 million items. The share of Apple and Samsung, which announced their withdrawal from Russia, decreased from 60% to 30%. Those were replaced by Chinese brands.

Sber, Russia’s biggest bank, provides data that also indicates that in December, January, and the first two weeks of February, many segments of non-food retail decreased in nominal terms by 20-30% compared to the same period last year.

Vodka instead of baby food 

The war triggered great commotion in Russia’s retail stores. Some Russians started stocking up on groceries. This caused a deficit of certain commodities, such as sugar.

Panic buying declined after a couple of months, drastically slowing down inflation. There was even deflation for two months in the summer. However, the year ended with food products going up in price by 15.8%, according to Rosstat figures. The products that showed the biggest growth were sugar (39,4%), dairy (15,2%), and seafood (14%).

The purchasing power of Russians fell in 15 out of 24 basic food categories. For instance, Russian nationals could buy 102.8 kilograms of beef with their average per capita income in 2021, and only 97 kg in 2022. At the same time, Rosstat claims that the availability of pork and chicken meat has increased.

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Alternative data show that prices have gone up even higher than Rosstat estimates. The Romir research holding says everyday goods went up in price by 41% during 11 months of 2022. Romir’s calculations are based on shopping data it collects from its regular respondents. Unlike Rosstat, Romir analyses the real purchases people make instead of the “market basket”. Romir’s estimates of price hike for medicines are also way higher than Rosstat’s: 30,5% against 10,2%.

According to NielsenIQ, fast-moving consumer goods prices (FMCG) rose by 21% in 2022. The company’s calculations are based on an audit of more than 120,000 retail outlets, including all retail chains, as well as conventional markets. Inflation-adjusted consumption fell by 3.4%, the biggest drop since 2014. Baby food and ice cream showed the biggest sales drop by 11.6% and 8.5% respectively.

Russians have also become less likely to buy yoghurt desserts or drinking yoghurts, and switched to cheaper goods in 2022, the Retail Companies Association (ACORT) reports. At the same time, sales of strong spirits went up by 7.5% in 2022.

In total, food consumption in physical terms fell by 1.5% in 2022, according to Rosstat, and by 3.9% in Q4,2022.

‘Low prices before abundance of offers’

A drop in sales volumes of Russia’s retailers was recorded over the course of 11 months in 2022; this was not the case even during the pandemic. The exception was the panic buying boom in March that followed the invasion of Ukraine. The retail sector is recovering as of January-February 2023, although it still shows figures similar to those of a decade ago (adjusted for inflation).

The level of consumption fell back to the 2013 figures this year. At the same time, the share of food in an average family budget increased from 23% to 32% during this period (although Russians now eat more meat, vegetables and fruit).

“Real incomes and population are declining largely due to the outflow of wealthy Russians, so the consumer market is shrinking. Business will keep cutting down expenses as Russians will grow poorer. Those who will focus on extreme discounters will be at an advantage. People need low prices, and not an abundance of offers,” says Andrey Sizov, the executive director at SovEcon.

Russia’s largest groceries retailer X5 and Azbuka Vkusa, the premium food store chain, also credit the decline of demand to the outflow of well-off people from the country.

Experts Novaya-Europe spoke to expect the situation in the consumer sector to become even worse.

“All the top sales volumes are history. There will only be a decline in the future. Last year will probably not be the worst year for retail, but 2023 may turn out to be one,” Fedyakov says.

Russians have already paid a lot for Vladimir Putin’s aggressive foreign policy. The country’s GDP could have been 30% higher than it is now if Russia had not annexed Crimea in 2014, says economist Sergey Aleksashenko, a deputy chairman of the Central Bank in the 1990s.

By the beginning of 2023, Russia’s GDP was only 8.4% higher than in 2012. If not for the “turn towards Crimea”, Russia’s economy could have grown by 41%, Aleksashenko believes. This is in line with the world average growth rate for this period (3.5% per annum).

And this growth could have enriched regular Russians rather than the military industry. Their wealth would be about 30% higher than it is now. For example, the average per capita monthly income, which now stands at 45,000 rubles (€530), according to Rosstat, could have reached 59,000 (€700) with the same level of inflation.

But the lost profits are not as noticeable as sugar or buckwheat disappearing from the stores, and the Russian authorities are still making sure that does not happen. Therefore, a gradual degradation of the Russian consumer sector should be expected rather than “hunger riots”.

“We are at this point where certain things have not yet got to us despite being expected long ago. A gradual aggravation of the economic situation awaits us. It has already started, and there is no end in sight,” Buklemishev says.