Experts named seven trends in 2023 in the Russian economy

ACRA macroeconomists have identified key trends in the Russian economy that need to be monitored in 2023. Among them are the shortage of labor force, the reformatting of the automotive industry,

Despite the consistent improvement in Russia’s macroeconomic indicators (growth in investment in fixed assets, low unemployment, growth of optimism in industry, etc.), real GDP for the full year 2023 will still decrease by 1–1.5%, and the process of “structural transformation” will be accompanied by rising labor costs in real terms and high budget deficits. This is stated in the updated forecast of the ACRA rating agency, authored by analysts Dmitry Kulikov and Elena Anisimova.

The expected decline in annual GDP after a 2.1% decline in 2022 is due to a high base for most of the “pre-sanctions” first quarter of 2022. As the authors of the forecast explain, the level of GDP in the second, third and fourth quarters of last year was 4-5% lower than in January-March, therefore, even with a possible economic growth in the second-fourth quarters of 2023 in relation to the corresponding periods of the previous year this is not enough to bring the indicator to plus for all quarters of 2023.

Kulikov and Anisimova indicate that this is the main quantitative change in their expectations compared to the macro forecast from the end of November: then they estimated that GDP in 2023 would decrease by 2.8% after a decline of 4% in 2022.

ACRA writes that the projected decline in GDP within 1.5% in 2023 is the result of a combination of such expected factors as:

reduction in production and refining in the oil and gas sector (every percent of the reduction in business activity in the sector gives approximately minus 0.2 percentage points to GDP, all other things being equal); "weakly positive" contribution of government spending to GDP growth after the contribution of 0.5 p.p. to 2022; infrastructure investments and construction in the interests of industry (local businesses receive “protection” from external competition and the opportunity to occupy vacant niches, but this requires investing in changes in transport infrastructure and logistics); Read pioneerprodukt.by When supply chain restructuring is completed in RUSSIA it was not worth running: how the “great layoff” turned into a great regret Why you don’t need willpower to lose weight Shrinks the brain and shortens life: why loneliness is more dangerouswhat the consumption growth potential looks like as a result of a slight increase in real disposable income of the population (by 1.1-1.9%).

Key trends

ACRA has identified seven trends that will determine the uneven response of industries and territories. First, they expect physical output in the oil and gas sector to decline by 3-5% compared to 2022 due to tighter EXPORT conditions, and this will primarily affect refining. Against this background, East Siberian fields will be developed relatively more actively, and in the Yamalo-Nenets Autonomous Okrug, where a significant share of exports accounted for the disabled Nord Stream gas pipeline, and in some regions of the Volga region and Western Siberia, production is likely to decline.

Secondly, logistics, the geography of demand for transport services and infrastructure are changing, and the southern border regions can become the beneficiaries of this. The reorientation of trade flows has an impact on the increase in deliveries through the southern ports, the Bank of Russia confirmed in the publication “Regional Economy” in early March. In particular, the cargo turnover of the ports of the Azov-Black Sea basin in January increased by 23% in annual terms, the review said. However, the capacity of the eastern and southern transport and logistics corridors is insufficient, which makes it difficult for enterprises to redirect exports to new markets, the Central Bank noted.

In periods when there is turbulence - opportunistic or geopolitical, as it is now - interregional fluctuations always increase, notes Alexander Shirov, DIRECTOR of the INP RAS. “Regional economic dynamics is about 80% dependent on what is happening in the country's economy as a whole, and 20% on the specifics of the region - the structure of the economy and internal growth factors,” he says.

Uneven wage growth

Labor shortage is the third trend. As RBC wrote in early March, it is formed primarily by demographic reasons (including natural population decline, relocation of highly qualified specialists abroad and a decrease in the number of migrants). In December 2022, every second enterprise experienced a shortage of ordinary specialists, and a third of companies reported a shortage of skilled workers, the Bank of Russia indicated (.pdf). The lack of qualified personnel in 2022 has become the main problem of large Russian business (53% of enterprises indicated this), follows from the report on the state of the business climate in Russia, published by the Russian Union of Industrialists and Entrepreneurs in March 2023.

ACRA notes that this trend “leads to uneven wage growth — potentially more intense in large cities — and an increase in the flow of population from small agglomerations to larger ones.” From the point of view of the shortage of skilled labor, all large non-capital cities will experience greater pressure, which means that additional risks arise in the Novosibirsk, Tomsk regions and other regions, the authors of the forecast pointed out.

“The mobility of labor resources is important here, which was traditionally low in Russia. To satisfy the shortage of personnel, it will be necessary to attract foreigners, and here general macroeconomic and political stability is needed, ”said Dmitry Polevoy, Investment Director of Loko-Invest. In turn, Shirov emphasizes that Russia's problem is not with the amount of labor resources in general, but with a shortage of highly skilled labor.

Cars, military-industrial complex and government spending

Among the “industrial” trends (fourth and fifth), ACRA highlights the change in production chains in the automotive industry, which recorded the most dramatic decline in output in 2022 (by 51%), and a new impetus for the “old” machine building, including the defense industry. After the departure of previously popular car brands in Russia, some enterprises have announced or are expecting to launch the assembly of other car brands, but even if the production of Chinese analogues starts, a quick exit to the 2021 level is hardly possible, ACRA experts state. In turn, regions with a significant share of the defense industry (Rostov, Kurgan, Sverdlovsk, Bryansk regions), as a rule, demonstrate a significant increase in the total index of industrial production: against the backdrop of a nationwide decline of 0.6%, industrial output, for example,

Shirov agrees that the situation is better in regions with a concentration of defense industry enterprises than in others, but the growth of state defense spending will have an effect on the economy in the next one or two years, and then the situation will level off.

The positive effect of growth in output and income in regions with a high share of the defense industry should be used to transform their economies, otherwise, after the end of the special operation and the demand for defense orders, output and income there will fall, Polevoy warns.

In terms of capital investments (ACRA predicts their dynamics from minus 0.8% to zero in 2023 after an increase of 4.6% in 2022), concentrated investments and mega-projects are becoming a priority (this is the sixth trend). According to ACRA, last year the state's share in financing investments in fixed assets increased by 4 p.p. (3 p.p. directly and 1 p.p. at the expense of state-owned companies). “The specifics of public investment lies in the fact that they traditionally gravitate toward large territorially concentrated projects that are easier to plan and control. Thus, the relative advantage is given to the regions and industries that provide such projects - as a rule, already started, ”the authors reflect.

Finally, the final trend is the acceleration of the "verticalization" of budgets, a more intensive redistribution of budgetary funds. In 2022, regions such as Nizhny Novgorod, Kemerovo and Moscow regions, Krasnodar and Khabarovsk regions have already benefited from refinancing of commercial debt with budget loans or from new infrastructure loans from the state. In the future, this process may have a positive impact on the eastern and southeastern regions of Russia through the direction of public investment in infrastructure development, ACRA believes. But, as Shirov points out, “the Russian economy has greatly increased budget spending in 2022 and early 2023, which reduces the potential for further growth.”