Russia’s economic growth remained strong in March and even accelerated mildly. GDP growth in January amounted to 4.6% y/y (after +3.6% at the end of 2023), supported by manufacturing and wholesale trade.

The current seasonally adjusted industrial production growth rate in January was 0.7% m/m, while the manufacturing and services PMI indices remained above neutral in January-February. Meanwhile, the labour market remains tight, with the unemployment rate falling again to 2.9% in January.

Against this background, consumer activity is supported by the growth of real disposable income - at the end of 2023, it increased by 5.4% y/y, which allowed it to approach the 2014 level.

Russian industrial production growth also accelerated in February. According to Rosstat, industrial production growth accelerated in February to 8.5% y/y, after growing 4.6% in January, significantly exceeding analysts’ expectations and the market consensus forecast of 5.6%, lead by booming manufacturing.

Russia’s manufacturing PMI also surged in February to post 54.7, up from 52.4 in January, putting in its biggest gains in 13 years, S&P Global reported on March 1.

The BRICS countries have already surpassed the G7 in most macroeconomic indicators and this gap will widen further.

Despite the current strong growth, Russia’s economy is very vulnerable. Growth is expected to slow from 3.6% in 2023 to 1.8% according to the official forecasts, and to only 1% according to the International Financial Institutions (IFIs).

Russian President Vladimir Putin may reconsider his position on continuing the war against Ukraine if the West can squeeze Russian oil revenues, and US secondary sanctions imposed on shipping is starting to bite as India turns away Russian oil tankers in March. However, new routes that bypass these secondary sanctions will likely emerge and Russian oil revenues will be decreased due to the costs, but continue to flow in. SO far the net effect of the new sanctions that were first introduced in December has been for the oil price discount that Russia offers to rise from about $8 per barrel to about $14 a barrel as of the end of March. Still, despite the sanctions and restrictions, Russia had a positive trade balance of $51bn last year.

The budget figures from the first two months of the year came out that show there was a deficit this January, but at RUB308bn ($3.3bn) it was nowhere near as bad as last year’s RUB3.3 trillion and the RUB1.7 trillion last January. However, by the end of February that had grown dramatically to a cumulative deficit of RUB1.5 trillion, or 0.8% of GDP.

While 0.8% is less than half of last year’s deficit, that is almost at the full year forecast for this year of a RUB1.6 trillion deficit in 2024, according to the budget forecast.

It raises the question: can MinFin really balance spending and revenues for all ten months left in the year? That will depend heavily on what happens to oil prices this year, how much the Kremlin spends on the war (a Russian spring offensive is expected), and whether the West can find more effective ways to sanction Russia’s income.

AS for the war in Ukraine: The Russian forces have the initiative since the fall of Avdiivka on February 17. Ukraine is running out of money, men and ammo. Since March 21 Russia has started an intensive bombardment of Ukraine’s power infrastructure to great effect. Unless the West comes up with more money and ammo for Ukraine, Kyiv is in an increasingly difficult situation that may bring the war to an end this year -- although that remains unlikely.

Putin has slammed allegations that Russia is planning to fight against Europe as “utter nonsense,” TASS reported on March 28 after French President Emmanuel Macron suggested that Nato should be prepared to put troops on-the-ground in Ukraine. However, Russia is expected to launch a new counteroffensive in May or June.

In retaliation to Russia’s new bombardment, Ukraine has stared striking Russia’s oil refining facilities: 24 attacks using long range drones have been launched in March of which 12 have been successful. This has reduced Russia’s oil products output by an estimated 14% as of the end of March and forced the Kremlin to start imports of gasoline from Belarus. While this will affect Russia’s export revenues, it is unlikely to be decisive unless Ukraine expands the campaign, which Ukrainian President Volodymyr Zelenskiy has threatened to do if more money and ammo from the West is not forthcoming.