Mikhail Zadornov About Russian Economy: “It’s a very different picture”

Noting that the economy showed a 2.1% drop last year but picked up by 2.1% in January-July 2023, Mikhail Zadornov informed that “the Draft 2024-2026 Budget Act relies on the projection of the GDP reaching a further 2.3% increase in 2024-2025, which, however, sounds too optimistic to some.”

Downturn and growth of industries

As can be seen from last year’s results, the sectors that had suffered most include retail trade, healthcare, and manufacturing industry. There was a sharp decline in household help expenditure and a 45% reduction in vehicle manufacture.

In the current year, the nation’s economic growth is driven mostly by agriculture, construction, hospitality sector, and defense industry. Sufficient growth has been shown by such industries as insurance, public administration and security, education, and electronic engineering (the latter owes its 30% increase to the manufacture of defense products). Growth is rebounding also in automotive industry.

Petroleum exports

According to the ex-minister, the government is not envisaging any embargo measures on the Russian oil within the next three years. Oil recovery is expected to remain at current level until 2026, and the average price of Brent crude oil is forecast to go down to $80 per barrel.

Europe-bound gas revenues currently account for mere one third of their pre-war levels, the oil export volume standing at 46 bln cubic meters after last year’s drop from 170 bln to 87 bln. Recovery to its pre-war levels is unlikely to happen even with another China-bound pipeline up and running. However, once in place, the new pipeline can ensure an increase in China-bound gas exports from 15 to 48 bln cubic meters by 2026, ultimately reaching a point, in three years’ time, where gas exports to Europe and China are equal.

By 2026, the ruble is expected to trade against the U.S dollar at around 92.

According to government estimates, inflation rate can return to normal (4%) in 2025-2026.

Federal budget

The preliminary draft estimates of the RF Government read that next year’s federal budget revenues can expect an increase of RUB 6 trillion, reaching 19.5% of GDP (compared to 18.1% in 2022). Contributing to this increase will be oil revenues, non-petroleum proceeds, as well as one-time revenues from two more sources – introduction of the integrated tax account, and increased vehicle recycling fee.

“Provided that the oil prices meet their projected values, next year’s fiscal deficit can be decreased by a mere 1%, which is, by any measure, a very small reduction.”

Mikhail Zadornov further gave a detailed outline of key expenditure items: around 80% of the federal budget is spent this year on national defense (3.9% of GDP), social policy (3.9% of GDP), national economy (2.5% of GDP), national security (1.9% of GDP), education and healthcare (0.9% of GDP each).

Banking sector

The external economic sanctions have had a serious impact on the stability of Russia’s banking sector, said Mikhail Zadornov. As far as growth of mortgage and credit lending is concerned, the forecast for next year is for a significant decrease. While in 2021 the banking sector’s profit stood at RUB 2.3 trillion rubles, in 2022 it measured a mere RUB 0.2 trillion. The projection for 2023, however, sounds promising: the banking sector is expected to generate RUB 3.4 trillion in profit. A quarter of this amount will be sourced from currency revaluation – the negative effect of the rouble appreciation last year is offset by noticeable profits from the weakening of ruble in the current year.

“Overall, despite the tough restrictions and the Russian banking system having had to shift its focus towards domestic customers, our banks did manage to achieve fairly good margins and growth rate.”

External trade

The ex-minister also dwelled upon the changing landscape of Russia’s external trade. While in 2013 the European Union accounted for 55% in total exports, in 2023 the nation’s export flows are bound mostly for China (30%), India (13%), and Turkey (10%). The imports from these countries are growing at the same high pace. Exports were booming in early 2022 in response to falling imports and have now returned to their usual rates. Further decline in Europe-bound exports is expected to bring them to a level of less than 10%.

“There’s hardly a country with trade flows redirected between 2013 and 2023 as cardinally as Russia’s. It’s a very different picture to ten years ago.”

The Russian ex-Minister of Finance’s talk was followed by a Q&A. The students were particularly curious about the effectiveness of oil embargo, bank deposits profitability, safe-keeping of savings, and advantages of discounted mortgage.