Even in its normal state, the Russian economy is as transparent as a Siberian snowstorm – but the country is currently in a state of emergency.

With Russia’s invasion of Ukraine, both the Central Bank of Russia (CBR) and the state statistics agency Rosstat have halted all data releases – from trade to investment. Meanwhile, many question the reliability of the figures that are still leaking out. Investment banks that no longer advise their customers on Russian companies are also reducing their research efforts. Multilateral organizations have withdrawn their economic experts from the country.

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Amid the storm, a heated debate has erupted over Russia’s economic performance. A study by five Yale scientists recently attracted general attention, which found that the withdrawal of Western companies and the sanctions against the country were causing the economy to be “paralyzed”. Apparent economic performance is pure illusion. “Putin selects statistics that are carelessly disseminated in the media.

Countless well-meaning but thoughtless experts then make forecasts that are disproportionately and unrealistically favorable for the Kremlin,” the researchers argue. Others are less pessimistic. “There is no such thing as an economic collapse,” noted Russia expert Chris Weafer wrote in a recent article. But where is the truth?

After the Russian invasion of Ukraine, the country’s economy went into free fall. The ruble has lost more than a quarter of its value against the dollar. The exchange crashed, forcing regulators to halt trading. Hundreds of Western companies withdrew or pledged their withdrawal from Russia while their governments imposed sanctions.

Just a month later, analysts revised their forecasts for Russia’s gross domestic product in 2022 from 2.5% growth to a nearly 10% decline. In some cases, the balance sheet was far bleaker. “Experts predict that Russia’s gross domestic product will contract by up to 15% this year, erasing the economic gains of the past 15 years,” the White House said.

Both sides of the debate agree that the country is still ailing. The massive interest rate hikes in the spring to stabilize the collapsing ruble and the withdrawal of foreign companies have driven the country into recession. According to official figures, gross domestic product fell by 4% in the second quarter compared to the previous year. Of the country’s 300 single-industry cities affected by the sanctions, most are experiencing a deep economic crisis.

Many citizens, especially the educated population, have fled Russia. Others move their assets abroad. The latest available data for the first quarter of 2022 shows that foreign investors have withdrawn $15 billion worth of direct investments from the country – by far the most serious figure on record. In May 2022, Russian remittances to Georgia – measured in dollars – were astonishingly ten times higher than a year earlier.

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Still, data analysis from a wealth of resources by The Economist does suggest that Russia’s economy is performing better than the most optimistic forecasts had predicted. The sale of hydrocarbons created a record current account surplus. Take the “current activity indicator” published by the bank Goldman Sachs, which shows economic growth. It fell drastically in March and April, although not on the scale of the global financial crisis of 2007-2009 or even the Ukraine conflict of 2014. Since then, values ​​have recovered.

Other indicators suggest similar scenarios of a recession that is not very deep, at least by Russian standards. In June, industrial production fell 1.8% yoy, according to a study published by bank JPMorgan Chase. An index of service sector growth based on surveys of managers shows a weaker decline than in previous periods of crisis. After an initial downturn, electricity consumption also appears to be rising again. The number of rail shipments, an indicator of the demand for goods, remains stable.

Meanwhile, inflation is falling. From the beginning of 2022 to the end of May, consumer prices increased by around 10%. The collapse of the ruble made imports more expensive; the withdrawal of Western companies reduced supply. According to Rosstat, prices are now falling again. Independent analysis by consultancy State Street Global Markets and data company PriceStats, based on Russian online prices, confirms a similar trend. In public statements, the CBR now not only worries about inflation, but also about falling prices.

The strengthening ruble has lowered import prices. With them, the fear of inflation among the Russian population has also diminished. A dataset from the Federal Reserve Bank of Cleveland, consulting firm Morning Consult and Brandeis University researcher Raphael Schoenle shows that expected inflation for the coming year fell to 11% in July from 17.6% in March. Since Russia has plenty of gas, an inflation-related rise in energy prices, as in Europe, should not be expected.

Households are not only relieved by falling prices. Also, the unemployment rate, which hit a record low of 3.9% in June, is quite misleading. To avoid redundancies, many companies have furloughed some of their staff without pay. But there is not much evidence of an employment crisis. Data from the Russian jobs platform HeadHunter suggests that the aggregate jobseekers-to-vacancies ratio rose to 5.9 in May from 3.8 in January – making it significantly harder to find a job – and then declined slightly. According to data from Russia’s largest lender, Sberbank, average real wages have risen sharply since the spring.

Even given the good situation on the labor market, people can continue to spend money. According to Sberbank figures, real consumer spending remained almost unchanged in July compared to the beginning of the year. In the spring, imports initially collapsed, partly because many Western companies stopped delivering. However, compared to more recent recessions, the decline has been limited and imports are currently picking up speed again.

Three factors are responsible for Russia consistently beating forecasts. One of them is politics. Vladimir Putin himself understands little about economic events, but likes to entrust the management of the economy to those who know their way around. The CBR is peppered with highly qualified professionals whose decisive action prevented the economy from collapsing. For example, the doubling of interest rates in February, combined with capital controls, led to a stabilization of the ruble and thus to a slowdown in inflation. The population knows that the head of the central bank, Elwira Nabiullina, is serious about price controls, even if her popularity is suffering as a result.

A second aspect concerns recent economic history. Russian Defense Minister Sergei Shoigu hit the nail on the head when he told the British government in February, according to The Washington Post, that Russians could “suffer like no one else”. After 1998, 2008, 2014 and 2020, this is the fifth economic crisis that the country has experienced in 25 years. Those over 40 still remember the extraordinary economic turbulence that followed the collapse of the Soviet Union. One has learned to adapt instead of panicking (or protesting).

Parts of the Russian economy have long been largely decoupled from the West. While this means slower growth, it has made increasing isolation less painful. In 2019, the stock of foreign direct investment in the country was about 30% of GDP, compared to the world average of 49%. Before the invasion, only about 0.3% of Russia’s working population was employed by US companies. Across the rich world, however, the figure was more than 2%. The country requires relatively few supplies of raw materials from abroad. So far, the strong insulation has hardly had any impact on the numbers.

Finally, the third factor is hydrocarbons. According to a recent report by the International Energy Agency, the sanctions had only a limited impact on Russian oil production. Since the invasion, Russia has made about 85 billion euros from selling fossil fuels to the EU. In view of the sanctions against the government, it remains a mystery how the country spends the foreign exchange gained in this way. However, there is little doubt that these transactions will allow Russia to continue sourcing its imported goods – not to mention the payroll payments and arms purchases.

As long as Putin doesn’t step down, Western investors will be reluctant to look at Russia. There will still be sanctions. The CBR admits that while Russia is less dependent on foreign raw materials, it is all the more dependent on machines from abroad. Over time, the sanctions are likely to take their toll and Russia will produce lower-quality goods at a higher cost. For now, however, the Russian economy is still thriving.

The article first appeared in The Economist under the title “Why the Russian economy keeps beating expectations” and was translated by Cornelia Zink.