December is the time for year-end performance reviews, economic performance included. Invest Foresight spoke with economist Igor Nikolayev, chief researcher at the Institute of Economics of the Russian Academy of Sciences, who cited several economic indicators for December 2022 and shared his economic expectations for the last month of this year and the near future.
— What is the end-of-the-year economic situation in Russia?
— It depends on what you are comparing it to. Any assessment should factor in the trends as much as the figures, and this is especially true in the current situation. If we compare what we have with the forecasts made in March, our 2022 results are not so bad after all.
Indeed, back then, we expected the economy to slump by 8-9%, but the actual decline is going to be about 3%, maybe a little more. As you know, the Ministry of Economic Development is projecting 2.9%, while the Bank of Russia is slightly more conservative, admitting that the decline may reach 3.5%.
If we compare the current indicators with older general forecasts for 2022 (which is also a legitimate thing to do), the assessment will be different – a 3-3.5% decline against a 3% growth target is by no means a good result.
It is also important to consider the phase of the economic cycle we are in, and we are in a downward phase. As you know, preliminary third-quarter GDP estimate was down 4%; the fourth-quarter result, apparently, will be even worse. In the first quarter of 2023, we are going to see a much worse decline almost for sure – down 5% or more because we will be using a very strong base of comparison, the first quarter of 2022.
— So what is the conclusion?
— So when you make the comparisons and assess that you are in a downward trend, the conclusion is — there is really nothing to boast about.
— What can we expect in December?
— The main defining point, announced long ago, is the EU’s embargo on Russian oil. As we know, the United States and Canada have long introduced these restrictions – and we should also factor them into the annual results. We are finishing the year in anticipation of the harshest sanctions to hit in 2023.
— What are the short-term prospects for the Russian economy?
— In view of the events of the past year, it will be difficult to prepare. We can, of course, choose a different strategy and just sit back and relax but it does not seem most appropriate.
Jokes aside, we should expect the economic situation to worsen in the next few months.
In the latest report by the Federal Service for National Statistics on Russia’s socioeconomic development, I particularly noted the retail trade statistics. We already know that in recent months, retail has dropped 9–10% year-on-year. But in September, if we look at the breakdown of the retail commerce into non-food and food products, we will see that the former category has lost 15%. Understandably, there has been a recorded collapse on the car market and in other segments. But in addition to that, the food retail has lost 3.5%. Frankly, I do not remember anything worse than 1% before.
It is common to believe that people will never stop eating. But, apparently, people are forced to cut costs even here.
— But when it comes to big figures, spending 3% less on food is not such a serious outcome?
— On the one hand, we realize that there are people who are not spending less and that is an average figure, meaning that others are indeed cutting their food budgets.
On the other hand, you may give up on buying a fur coat or shoes this year. But you still have to buy food. You can’t starve for a month. Therefore, 3.5% is significant.
— So essentially, if somebody is buying bologna instead of smoked sausage, it is a substantially negative effect?
— Yes. In terms of calories, it may be an equivalent product. And yet, the customer has to opt for something cheaper.
— What should be done, if possible, to minimize negative trends?
— Speaking about economic problems, the embargo on Russian energy resources is an enormous challenge that is only starting to be introduced widely. Or may start. By the way, another embargo, on oil products, comes into effect on February 5.
It turns out, even amidst the sanctions and at the time of toughest restrictions, there are still industries and products released from sanctions. These include agricultural products and mineral fertilizers. There are also other categories of products, including the pharmaceutical industry and medical devices.
So, we have something that may, to a certain extent, become the new oil. I believe that, in view of this fact, it is important to pursue an active global expansion policy with respect to the products in these industrial and economic segments.
The expectation was that we would be able to redistribute oil sales to the markets in Southeast Asia easily. But firstly, the region has no infrastructure to process such amounts and secondly, the rates are not in our favor.
— There is nothing wrong with Russia no longer feeding energy resources to the world and instead switching to food exports. Is that correct?
— For decades, we have been talking about getting off the oil needle but in reality, the dependence has remained. Now it appears that we have to do it after all. And, since we are getting off the needle, we have to realistically and seriously think about properly substituting our oil exports.