Early 2024 dynamics matter most – Igor Nikolaev

Igor Nikolaev, Director of FBK (Financial and Accounting Advisors) Strategic Analysis Institute, shared his view on the economic results of 2023 and expectations for 2024 in terms of the economy’s impact on reality.

Igor Nikolaev, Director of FBK (Financial and Accounting Advisors) Strategic Analysis Institute. Vladimir Trefilov / RIA Novosti

– The question of last year’s results is not as simple as it seems at first glance. The good things certainly need to be highlighted, but with certain reservations. And once you do that, these good things look a little different. They’re good, but…

Let’s start with the main macroeconomic indicator – economic growth of about 3.5%. Good? Yes! But when you analyze the growth drivers and consider further growth prospects – how stable, long-term and reliable that growth will be – you suddenly have a lot of questions. Last year’s growth was the result of the fiscal stimulus, a strong and very powerful impulse given to the economy in 2023, and Russia still has enough money to maintain this policy for now. Considerable amounts have been injected into the economy and will be used to support it in 2024. But a fiscal stimulus and large amounts of government money almost always mean state contracts. Last year’s GDP increment was at least as high as the increase in state orders. In this way, we could have achieved a 10% growth as well by draining the National Wealth Fund.

Growth of 3.5% is formally good. But what are the chances that it will continue in the long run? Look at the recently adopted three-year federal budget for 2024–2026 – the document states things clearly enough. The fiscal stimulus policy will continue in 2024, that is, the country will still have the money to finance it – spending should increase by 22%. In 2025, federal budget expenditures will decrease by 6% compared to 2024 in nominal terms; in reality, they will decrease even more. In 2026, the situation will be similar to 2025.

In other words, the high federal spending will gradually dry up. And that will be the end of the fiscal stimulus.

What will this mean? That it will be extremely difficult to stay in the black in 2025. What could help? Oil prices soaring to $200 per barrel? Or something just as probable. But the global economy is slowing down, and the peak of oil prices will pass. China is slowing down – a country that has made the most significant contribution to boosting the consumption of Russian petroleum products.

In 2022, Russia’s economy was supported by the demand for our petroleum products, and in 2023, by the fiscal stimulus. The policy will continue in 2024.

Hence the mixed attitude to Russia’s macroeconomic indicators: they are good, but unstable and potentially unsustainable. I think that growth will continue through 2024 at most, and will slow down in any case.

Why? Because 2024 will be different from 2023. The Central Bank’s key rate will start at 16%, not at 7%, as it was in 2023. The high fiscal stimulus will be offset by a lower credit stimulus. With high federal spending, loan money will have to be reduced to keep inflation down and to reduce it to 4% by the end of 2024, as the Central Bank wants.

But when borrowing becomes more expensive, consumer activity always declines. Therefore, the Bank of Russia expects growth of only 0.5–1.5% in 2024.

Inflation is about 7.5% today, and will remain at least as high as that. But we entered 2023 with a forecast of 5.5%. An excess like this is very serious.

Moreover, it is not only a specific indicator that is important but also the dynamics in early 2024. Despite the fact that the key rate has been hiked as high as 16%, the annual inflation rate continues to grow – and it is with this high inflation that we are entering 2024. How can it go down to 4%? What can be done to achieve that? Especially since the inflation grows mostly by inertia.

The small advantage, however, is that we have been able to keep the consumer price index within the one-digit range.

Another economic fallback of 2023 is a serious devaluation of the ruble. If we compare the exchange rates at the beginning and at the end of the year, the national currency is seriously weaker. But again, further devaluation has been prevented and there remains relative macroeconomic stability. In comparison to other countries, Russia is doing rather well.

As concerns 2024 in general, I can say with certainty that it will be better than 2025. I believe that the growth rate will be close to zero but we will stay in the green, most risks spilling over to 2025.

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