By Alexander Marrow
MOSCOW (Reuters) – Russian President Vladimir Putin on Friday said he would run again for president in March, seeking to maintain his hold on power until at least 2030.
Russia’s success in evading a Western oil price cap is helping drive a recovery in economic growth, despite the problems caused by labour shortages, inflation and high interest rates.
Here are some of the economic challenges Russia will be facing as voters go to the polls.
LABOUR SHORTAGES
Russia’s military mobilisation last year and hundreds of thousands of people emigrating since Russia invaded Ukraine has aggravated labour shortages, particularly in high-skilled areas like IT, pushing unemployment to a record low 2.9%.
With Moscow ramping up military production and throwing fiscal resources at the military, some sectors are short on staff, hampering productivity.
Post-pandemic conditions and increased government demand in 2022-2023 have seen workforce capacity and resources reach historically high levels, said Dmitry Kulikov, director at the ACRA ratings agency.
“This means that economic growth will be constrained on the supply side, as a result of which annual GDP growth rates will fall from around 3% in 2023 to closer to the potential 1-2%,” Kulikov said.
GDP GROWTH
Putin on Thursday lauded Russia’s economic health, casting the West’s sanctions as an onslaught that has failed to land any meaningful blows.
Russia’s economy has dealt with sanctions better than either Moscow or the West first expected, helped by higher military spending and recovering oil revenues.
Gross domestic product (GDP) is set to grow 3.5% this year, Putin said, up from a 2.1% contraction in 2022.
In the longer term, both Russian and external forecasts envisage Russia’s growth potential easing. Analysts polled by Reuters expect GDP growth to slow to 1.2% in 2024.
REAL INCOMES
Real disposable incomes are always a sensitive issue ahead of elections in Russia. But after a contraction in 2022, real incomes are set to recover sharply this year, driven by significant wage jumps in manufacturing and the military, as well as fiscal support for families affected by the war and mobilisation.
The nature of these jumps means that income growth has not been spread evenly across sectors and regions, leaving many families still struggling to make ends meet.
“At some point, companies will start reducing costs, including optimising their workforces,” Sovcombank’s Andrei Krylov said in a December report. “This will lead to laying people off, lowering their incomes and inflation slowing.”
INFLATION
Price rises are a sensitive issue for consumers and the central bank’s key area of concern. Already forced into 750 basis points of monetary tightening since July, the bank is widely expected to hike again, to 16%, on Dec. 15.
Inflation is due to end the year at around 7.5%, following a double-digit rise in 2022, still well above the bank’s 4% target.
Wage pressure may keep inflation high. The central bank this week said that continued high inflation and lending meant that interest rates would have to remain at an elevated level for a long time to bring inflation back to the target.
Interest rates are seen above 10% throughout 2024, but inflation is ultimately expected to slow.
ROUBLE
“Authorities are worried about the rouble because they’ve reintroduced capital controls and the central bank was forced to hike,” said Elina Ribakova, senior fellow at the Peterson Institute for International Economics and the Kyiv School of Economics (KSE).
Putin issued a presidential decree in October ordering some exporters to convert some foreign currency revenues and the central bank made an emergency, 350-basis-point rate hike in August as the rouble tumbled past 100 to the dollar.
A relatively weak rouble is factored into Russia’s budget plans and boosts state coffers as most export revenues are converted from other currencies, but it pushes up import costs, fans inflation and risks capital flight.
“Conditions for relatively rapid exchange rate fluctuations (5-10%) remain in place on the domestic FX market,” said ACRA’s Kulikov.
OIL PRICES
An area of some comfort to the Kremlin is that oil prices, the lifeblood of Russia’s economy, are currently well above what Russia needs for fiscal security.
A series of output cuts by OPEC+ countries and the widespread circumvention of a Western price cap are all combining to boost Russia’s energy revenues.
Should the West find a way to cause Moscow problems, that could pose the biggest challenge of all for Russia, ultimately threatening growth prospects and reducing budget revenues.
“If budget deficits increase relative to published plans or export volumes fall, the decline in interest rates will happen more slowly,” said ACRA’s Kulikov.
Ultimately, the West needs to find ways to put more pressure on Russia’s finances if it wants to see improved results, said Ribakova, pointing to capital flight, labour flight and technological choking as three key target areas.
(Reporting by Alexander Marrow in London, Reuters in Moscow; Editing by Mike Collett-White, William Maclean)
