Published on January 10, 2024
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If you listen to the words of the Kremlin's master, Russia's economic situation in 2023 is practically better than in 2021. The international sanctions adopted by Western countries to make Russia pay for its invasion of Ukraine would have no effect. The strategic alliance with Beijing and the Indian partnership would make it possible to address the decline in energy exports to Europe. But what is the numerical reality of the Russian economy beyond words, ideas and incantations?
In the ideological war that Russia wants to wage against the Western democracies, all weapons can be used and influence communication among them. The reason for this is to tell the enemy that the weapons they are using are ineffective. This is the Kremlin's rhetorical strategy towards economic sanctions.
A very structured speech was created. This is about circumventing economic sanctions worldwide. It consists of two components: one concerns sales opportunities in the energy sector and the other concerns new supply channels.
Unfortunately, the transport infrastructure has been repaired
China, presented as a privileged strategic ally, would thus have become the new market for Russian gas and oil. But there is nothing magical in the industrial and infrastructure sector. Gas pipelines are required for both gas and oil. Some are certainly connected to Chinese infrastructure, but most Russian networks are Europe-facing. It will take time and a lot of money to build an equivalent in Asia. Given the thousands of kilometers that need to be implemented, no project can be completed in 12 months. Energy imports to China by land and sea could not replace the huge European market. Of course, the same applies to the Indian partner.
Exports to China and India could only partially replace the volumes of gas and oil sold on the European market. In addition, Western countries have set a maximum price of $60, above which ship brokers cannot insure Russian oil cargoes. The additional logistical transport restrictions and the value limitation of sea transport have led to a decline in Russian energy revenues. The International Energy Agency has proposed a figure of 30% for the first months of 2023.
Added to this is the barrel price effect. Although the latter fluctuated between $80 and $120 in 2022, throughout 2023 this price was between $70 and $95, which resulted in less revenue for the same quantity sold.
This value setting is important and means that the development of the ruble value is taken into account.
Currency devaluation
By cleverly deciding to require payment for its energy exports in rubles, the Russian government has triggered a surge in demand for its currency in 2022, which automatically leads to an appreciation of the currency. In 2022, the ruble rose from 0.8 cents to 1.6 cents. But the situation in 2023 followed a reverse cycle with a significant decline in the Russian currency compared to the euro, as the ruble fell back to one cent (100 rubles for one euro, as shown in the graph below), that is, a decline by 27% a year…
Source and graphic: Strategic Conseils
(Source and graphic: Strategic Conseils)
This significant weakening of the currency naturally led to an increase in import costs by the same percentage. The result was an accelerated increase in the prices of all imported products, that is, imported inflation, which was accompanied by domestic inflation, which was associated with the decline in the labor force in civilian production, coupled with the labor needs of the army.
The government and the central bank have therefore decided to introduce a policy to combat inflation.
The rise in central bank interest rates
As part of a very classic monetary policy (already used in previous ruble crises), the President of the Russian Central Bank, Elvira Nabiulina, decided to double the key interest rate within six months, increasing it from 7.5% to 16%…!
The following graphic (blue line) describes this acceleration in the second half of the year compared to the level and weak change in the European Central Bank's key interest rate in 2023.
This increase in the Russian Central Bank's interest rate to 16% means that the real inflation rate is actually much higher than the 7% rate announced by the authorities. The rationality of a central bank's monetary policy is to set its key interest rate at the level of the inflation rate that it has decided to combat. This was the policy of the ECB, the FED and the Bank of England…
The real Russian inflation rate will therefore be over 10% in 2023.
This significant increase in key interest rates is also intended to support the ruble exchange rate by attempting to slow the outflow of capital through high remuneration. The decline in the value of the ruble by more than 25% in 2023 is the driving force behind the increase in the price of all imports… and therefore inflation…
However, this key interest rate level also leads to a weakening of the economy by drastically reducing the investment capacity of households and companies. This examination of the global economy leads us to take a look at the development of the Moscow Stock Exchange since the beginning of the war in Ukraine.
A structural decline in the Moscow stock market
By aggregating the price trends of 50 companies, the RTS benchmark index is comparable to our CAC 40 index. The comparison with Paris and New York is revealing. First of all, we see that the Moscow Stock Exchange began “unscrewing” five months before the start of the invasion of Ukraine. The economic circles of large companies close to power knew about it. The outbreak of war caused the RTS index to fall by 60%; On average for 2023, it remained at -45% of its October 2021 value. Compared to Western stock markets, Moscow is therefore facing a significant devaluation of its large companies, information that has never been communicated or commented on.
On the other hand, this drastic drop in valuation affects the ability of these large companies to borrow, as the drop in their valuation symmetrically increases their debt ratio.
Inflation associated with rising energy prices has stabilized and is beginning to slow. Western stock markets are therefore bullish in 2023, with an acceleration towards the end of the year linked to the prospect of the start of a cut in central bank interest rates in the coming months.
There is nothing like that in Russia, the RTS index (blue line) remains low and flat.
Russian companies are therefore expecting a bleak 2024, reflecting the decline in global oil and gas prices.
Hopeless prospects
Russia remains a prisoner of the priority given to its raw materials, to the detriment of the creation of value-added sectors. The recent decision by TotalEnergies and Chinese and Japanese co-investors to suspend their participation in the Artic LNG-2 gas project shows that expanding Russia's energy resources is not on the agenda. Therefore, no improvement can be expected in this area as long as the war in Ukraine continues.
Economic sanctions continue to pile up, such as those imposed by the European Union for stopping the purchase of Russian diamonds from January 1, 2024.
To these external elements is added the internal parameter of significant labor restrictions specifically related to the war in Ukraine. More than 300,000 fully able-bodied Russians were killed or injured there. Hundreds of thousands of others in service jobs, especially in IT, left the country and sought refuge in Kazakhstan, Turkey, Georgia and Dubai. Immigrants from Asian countries prefer to leave the country to avoid being forcibly drafted into the Russian army. So many skills and added values that the Russian economy will still lack in 2024.
The government boasts GDP growth of 5% in the third quarter of 2023, with the currency having lost more than 25% of its value this year…
There is the speech intended to convey the best possible economic picture to the Russian population in order to boost their morale. It is also a communication weapon for “enemies of Russia.” But these enemies are less subject to the Kremlin's incessant propaganda and are able to identify the actual economic data facing the Kremlin.
If the war continues, there will also be economic decline.