Russia continues to face lingering economic turmoil despite the country’s currency rebounding after a massive Russian central bank intervention aimed at stabilizing it. The ruble is now trading at 56.61 to the dollar, down from a low of 121.53 the day after the invasion of Ukraine. In an effort to bring the value of the ruble back to somewhere between 70 and 80 to the dollar, roughly where it was before the war, Putin signed an order on Thursday relaxing some capital controls.
The strong rouble, which is now worth more than it has been in the past four years, threatens the country’s exports, as it makes buying Russian goods more expensive for foreign buyers. In addition, it increases the size of an already growing federal budget deficit, fueled by military spending and measures to mitigate the effects of Western sanctions. The country’s finance minister has estimated that there will be a 1.6 trillion ruble hole in the Russian budget by the end of this year.
Officially, Russia’s GDP is expected to shrink by 7.5% in 2022. The World Bank puts this figure at 11.2%. Real incomes, eroded by inflation, wage arrears, layoffs and the shift to part-time work, could shrink by up to 9%, according to a recent analysis published in the business daily Kommersant. This estimate is about 3 points higher than that of the Ministry of Economic Development, which predicts that even in the best case scenario, by 2025 the real incomes of Russians will be lower than in 2013, before the start of the first series of Western sanctions..
The Russian economy is largely supported at the moment by oil and gas revenues. Western embargoes, which have caused prices to skyrocket, have not yet completely shut the country out of the global energy market. Although the United States and its NATO allies are trying to increase the isolation of Moscow, while Germany has just announced that the EU is “days away” from banning imports of Russian oil, China, India and other countries are stepping forward to buy up its supply.
In April, Chinese purchases of Russian products, mostly oil and natural gas, reached $8.89 billion, up 56.5% from a year ago. Yet Russia sells barrels at around $10 below market price, with consumers eligible for a steep discount.
Rather than diversifying its economy or trading partners, Russia is becoming increasingly dependent on the energy sector and tying itself with a relatively small number of big buyers. Revenue from the sale of oil and gas, which fell from 1.2 trillion rubles in March 2022 to 1.8 trillion in April 2022, accounted for 63% of Russia’s budget last month. In the first four months of this year, they were 48%, compared to 36% for all of 2021.
While Moscow is reaping significant benefits from soaring oil prices, Russian production is actually falling. In mid-May, daily oil production was 830,000 barrels lower than in February. There are not enough buyers to make up lost markets and there are significant logistical challenges in getting goods to new places. Infrastructure – pipelines, ports, roads, etc. – needed to divert large quantities of supplies from Europe and route them elsewhere do not currently exist and will take years to build.
The situation of coal producers is emblematic of the crisis. In 2021, Russia sold half of its 440 million tonnes of product to foreign markets. One hundred and ten million of that sum went to Europe, which has now banned purchases of Russian coal, valued at around $8 billion. Indian steelmaker Tata Steel, the biggest importer of Russian coal into the country, later said it would not buy again. Great hopes are placed on the Asian market, but it is still unclear how to get the goods there. As a professor of geography at Moscow State University has noted, a potential, albeit circuitous, route through the Baltic Sea may well be impossible due to the anti-Russian alliance of willing states. along the shoreline of the body of water.
In her remarks to the Rosbalt news outlet, Natalya Zubarevicha said there was a possibility that the situation could lead to social unrest in Kuzbass, a Russian coal production center. Low wages, poor working conditions and continual work accidents have already fueled the anger of workers here. Recently, a government official described conditions in the industry as “resembling bondage”. In the first quarter of 2022, Kuzbass coal supply for export fell by more than 10%.
“[Strikes] cannot be ruled out,” Zubarevicha said. “It is now forbidden for large Russian companies to lay off workers. … [Workers] will not be fired, but their salaries will be reduced. It is difficult to say how long they will last like this,” she observed.
Whatever temporary arrangement Russian companies have managed to secure at the moment could also be short-lived. On Tuesday, NATO chief Jens Stoltenberg threatened countries that continue to trade with Russia as well as China. “Freedom is more important than free trade. Protecting our values is more important than profit,” said Stoltenberg, in a remarkable discovery of moral economics.
Oleg Deripaska, one of Russia’s richest men, recently said it would be a “great success” if the country managed to maintain its exports at 80% of their pre-war level.
Anti-Russian sanctions also hit the economy in other ways. Compared to the same period last year, in April, Russian government revenue from outside the oil and gas industry fell by 18%. A crisis in imports, which according to the Ministry of Economic Development will decrease this year in physical terms by 26.5% and in value terms by 17.1%, is also taking its toll, as the government loses revenue from tariffs, customs duties and value added taxes.
Officials currently say unemployment stands at just 6.7%, down from 4.8% last year. During March and April, Russia added 40,000 unemployed, bringing the total number of people looking for work to 690,500, according to government officials.
Alexander Safonov, a professor at the University of Finance under the Russian Government, recently described the numbers as a “slick figure”, in an interview with Mk.ru. They do not reflect the real situation caused by the massive withdrawal of foreign companies from the Russian market, the disappearance of foreign buyers and production problems due to the lack of components and spare parts.
Many workers have been laid off or placed on part-time schedules, masking the true extent of unemployment and underemployment. For example, Avtozav, one of the country’s leading automakers, has repeatedly laid off workers in recent months, including twice in May. Recently, it extended a temporary shutdown that was due to last from May 16 to 20 for another seven days.
In order to prevent a collapse in the labor market, the government has imposed various restrictions that limit the ability of employers, at least those outside the underground economy, to lay off workers. Experts predict that as these limits expire in the coming months and economic hardship worsens, unemployment will rise through the summer and fall. Some large companies have already announced their intention to lay off 10 to 20% of their workforce.
According to a report by Kommersant, 68% of small and medium-sized businesses cut labor costs, 25% cut wages, and 27% laid off employees. Companies are suspending the payment of bonuses and cost-of-living adjustments. Vacancies, even in sectors like construction that have seen an exodus of migrant workers, are down.
Total wage arrears, reports the government agency Rosstat, amounted to more than a billion rubles as of April 1. They increased by more than 77 million during the month of March.
Inflation is rampant, with parts of Russia seeing the price of goods and services soar by almost 20%. The cost of “sanitary technology” – i.e. toilets, drains, etc. – increased by 70% between February and April. A recent survey by the Social Opinion Fund in Russia found that 80% of respondents said prices continued to rise rapidly in the past month. Many, especially those living outside major cities, also say the quality of produce, especially salami, canned foods and dairy products, is declining, according to research from the Center for the Study of Consumer Behaviour.