Russia has made significant adjustments to its economic forecasts in response to the ongoing conflict in Ukraine, with the Ministry of Economy now predicting higher inflation and a much weaker rouble against the U.S. dollar.
The increased costs associated with the war in Ukraine have prompted these revisions, and they could have wider implications for Russia’s economic policies in the coming years.
President Vladimir Putin is preparing the $2.1 trillion Russian economy for a prolonged conflict, and while Western expectations of a swift Russian economic crisis have proven incorrect, the higher projected inflation and a weaker rouble may necessitate higher interest rates and stricter currency controls to prevent capital flight.
The rising prices also pose challenges for the Kremlin as it prepares for the closely managed 2024 presidential election, where Putin, Russia’s longest-serving leader since Josef Stalin, is expected to run for reelection.
According to documents from the economy ministry, the inflation forecast for 2023 has been raised from 5.3% to 7.5%, and the forecast for 2024 has increased from 4.0% to 4.5%. This new projection implies that Russia will not reach the central bank’s target of 4% inflation until 2025, a year later than previously planned.
In July, the central bank had projected inflation for 2023 to be in the range of 5.0% to 6.5%, with a decrease to 4% in 2024. However, bank officials recently cautioned that decisive monetary policy measures were needed to address rising prices, putting the inflation target at risk.
The economy ministry has also adjusted its expectations for the rouble’s exchange rate, now forecasting an average annual rate of 85.2 roubles per U.S. dollar in 2023, up from the April projection of 76.5 roubles. In 2024, the ministry anticipates an average rate of 90.1 roubles per dollar, compared to the previous estimate of 76.8 roubles. The projection for 2026 places the average annual rouble rate at 92.3 against the dollar, up from the previous forecast of 78.8 roubles.
In response to the rouble weakening below 100 per dollar in August, the central bank implemented an emergency rate hike of 350 basis points to 12% on August 15. As of Tuesday, the rouble was trading at approximately 95 to the dollar.
Despite concerns over the rouble and inflation, the economy ministry has increased its growth forecasts for 2023 and 2024 while lowering them for 2025 and 2026, in line with the expectations of limited long-term growth prospects for Russia.
The ministry has more than doubled its 2023 gross domestic product growth forecast, raising it from 1.2% to 2.8%, and adjusted its 2024 forecast to 2.3% from the previous 2.0% estimate. Unemployment, currently at a historic low in Russia, is projected to remain at 3.1% for the foreseeable future, underscoring labor market shortages.
President Putin, who has emphasized Russia’s resilience in the face of Western sanctions, praised the central bank for managing inflation with double-digit interest rates. He expressed confidence in addressing the rouble’s volatility, stating that there were no insurmountable challenges.
Prime Minister Mikhail Mishustin also highlighted positive economic indicators, including the recovery of oil and gas revenues, despite Western sanctions. He pointed to strong growth in manufacturing and various industries, demonstrating the adaptability of Russian businesses to external challenges.
Here are the key forecasts from the economy ministry’s base scenario:
2022 2023 2024 2025 2026
Brent price $/barrel 101.0 83.5 85.0 80.2 76.2
Roubles per U.S. dollar, average yearly 67.5 85.2 90.1 91.1 92.3
Export of goods, billion $ 590.8 459.1 471.0 481.1 496.7
Import of goods, billion $ 276.7 313.8 319.7 326.8 335.5
Trade balance, billion $ 314.1 145.3 151.3 154.3 161.2
Current account balance, billion $ 236.1 74.4 80.7 77.8 80.8
GDP growth % yoy -2.1 2.8 2.3 2.6 2.2
Industrial production growth % yoy 0.6 3.6 2.6 2.3 2.3
Inflation, % to Dec. 11.9 7.5 4.5 4.0 4.0
Investments in fixed assets, % yoy 4.6 6.0 2.3 3.0 3.0
Retail trade turnover, % yoy -6.5 5.8 3.6 3.5 3.5
Real wages, % yoy 0.3 6.2 2.5 2.8 2.3
Real disposable income of the population, % yoy -1.0 4.3 2.7 2.6 2.6
Unemployment, % 3.9 3.1 3.1 3.1 3.1
