Russia’s War Economy

Despite facing Western sanctions, the Russian economy proved to be more resilient than anticipated, with a contraction of just -2.1% in real GDP last year. However, the outlook for the future is challenging, and it is expected to contract by an additional -1% this year. Thanks to various public support measures, such as a debt moratorium (until October 2022), tax deferrals, and favorable terms for corporate loans, business insolvencies decreased by -12% year-over-year in 2022. Given the government’s ability to continue providing fiscal support to firms, it is expected that insolvencies will remain stable in 2023, similar to the low levels observed last year. Although Russia’s FX reserves have recovered since September 2022, the fiscal deficit is expected to rise to -3.2% of GDP (up from -2.3% in 2022) due to increasing military spending and declining energy export revenues. To fund the fiscal gap, the government plans to issue domestic bonds (OFZ) and withdraw from the National Wealth Fund. However, budget financing beyond 2023 may become more challenging.

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