The Central Bank of Russia (CBR) has substantially upgraded its growth outlook for the next two years, raising the upper band for its group outlook in 2024 to 2.5% from 1.6% and to 2% in 2025 from 1.5%, the regulator said on August 11.

The CBR has constantly increased its estimates during the year as extreme sanctions on Russia have failed to do as much damage as first feared. The international financial institutions (IFIs) have also regularly upgraded their outlooks as well.

“The better than expected pick-up in Russia’s GDP growth in the second quarter, to 4.9% year on year, confirms that the economy had a strong first half of the year. But with limited slack in the economy this is likely to further fuel inflation pressures and result in policy tightening, causing growth to weaken over the rest of the year and into 2024,” said William Jackson, the chief emerging markets economist at Capital Economics, in a note.

The outturn was above the consensus forecasts of 4.3% y/y and was up from -1.8% in the first quarter. The improvement from the first quarter was heavily influenced by base effects as the second quarter in 2022 marked the worst of the downturn resulting from the war in Ukraine and sanctions.

The CBR projects that improvements in the country's economy will persist throughout 2024-2025, followed by a return to a “stable growth trajectory” of 1.5–2.5% in 2026, the regulator said in a report on key monetary policy areas for the years 2024-2026, published on August 11.

At the start of the year the CBR forecast growth this year would be in the band -1% to +1%, but now the regulator is predicting growth of between 1.5% and 2.5% for this year.

​The central bank's new projections suggest an expected GDP expansion of 1.5-2.5% in 2024, followed by growth of 1-2% in 2025. (chart)

Russia’s GDP declined by 1.9% y/y in 1Q23, according to the preliminary estimates from statistics agency RosStat in May, but as the summer kicked in the economy has made a strong recovery. Even international experts now believe the economy is doing far better than expected.

“The Russian economy has recovered from the downturn of spring 2022. The latest forecasts point to recovery of GDP this year. The IMF’s forecast now sees GDP growth of 1.5% this year, while the Bank of Russia forecast expects growth in the range of 1.5-2.5%. The July forecast average published by Consensus Economics puts growth this year at around half a percent,” the Bank of Finland institute for Emerging Economies (BOFIT) said in its weekly update on August 11.

Many analysts suggested that sanctions would mean Russia stagnating in the coming years and while growth of 2.5% is still well under Russia’s potential, it is probably enough to allow it to at least tread water.

“The recovery in the first half of the year has been supported by fiscal stimulus, which lifted retail sales and industrial production. It now looks like Russia will easily attain our full-year growth forecast of 1.3% (something of the order of 2% now seems more likely),” said Jackson.

At the start of this year many analysts said Russia’s maximum growth potential was 0.5% to 1% – a rate where Russia’s economy stagnates.

Regarding inflation targets, the central bank plans to assess the necessity and timing of target reduction once stability is achieved near the 4% mark, alongside a reduction in overall economic uncertainty. 

Inflation has started to rise again as expected and should end the year at around 6% according to the CBR, which put through a surprise 100bp rate hike in July to head off rising inflationary pressures. Another hike at the next meeting is also on the cards, say analysts.  (chart)

“Strong growth is resulting in higher inflation and a worsening current account. The central bank’s recently started tightening cycle will have further to run, and the government is likely to tighten its belt. Growth is likely to weaken significantly over the second half of the year,” said Jackson.

Enhancing communication with the market is also on the central bank's agenda, with plans to disclose key details of negotiations concerning the dynamics of the key rate.

In the context of a floating ruble exchange rate, the central bank may engage in foreign currency transactions involving the Chinese yuan to uphold stability, the CBR said.

The ruble has significantly weakened this year. The ruble remained under the pressure of a declining foreign trade surplus in July, as sales of revenue of exporters in foreign currencies fell by 1.6% to $6.9bn, the central bank said in a report on August 8. 

The ruble has lost nearly half its value since the start of the war as the ruble dollar exchange rate approaches RUB100 from around RUB60 shortly after the start of the Ukraine war in 2022.

The ruble's performance, now influenced mainly by the balance between foreign currency demand from importers and supply from exporters, is less dependent on capital flows in the new scenario, the CBR said.

Addressing limits on ruble transfers abroad, the central bank emphasised that mutual agreements with China would be necessary for easing these limits.

The central bank plans to segregate the standard liquidity provision mechanism to banks into core and additional components in 2023. Fund-raising terms for banks will be contingent upon transaction goals.

In terms of risk scenarios, the central bank highlights the heightened fractured nature of the world and the potential for a crisis akin to that in 2008. The statement outlines potential consequences such as countries producing goods domestically, limiting competitors' access to technology, and forming partnerships based on geographical proximity and geopolitical affinity.