The Russian economy, despite facing ongoing military operations and continuous external sanctions, has demonstrated a surprising degree of resilience and growth in 2024, revealing a complex interplay of factors driving this developmentAs industrial production plays a crucial role, rising consumer confidence has been bolstered by the Central Bank's aggressive interest rate hikesThese dynamics suggest that Russia could witness significant growth in its Gross Domestic Product (GDP) this year, although challenges related to sanctions and domestic resource shortages cannot be overlooked.

Market analysts and government sources are optimistic about the economic outlook for Russia this yearA recent macroeconomic forecast from the Eurasian Development Bank (EDB) projects a remarkable GDP growth rate of 4.1% for 2024. This figure stands as the highest increase in the past 12 years, following a robust recovery after the lifting of pandemic restrictions in 2021. While concrete economic statistics for the year have yet to be released, various institutions predict substantial growth, with the government emphasizing that Russia's GDP growth will outpace the global average

Deputy Prime Minister Alexander Novak indicated that last year's growth was at 3.6%, with expectations for this year set at 3.9%, which he claims is several times higher than that of developed nations.

Examining the economic trajectory over the year reveals a pattern of divergence; the economy thrived in the first half but has cooled off in the latter halfIn the first two quarters, GDP grew by 5.4% and 4.1% year-on-year, respectively, but the third quarter saw a slowdown, with growth dropping to 3.1%. Nevertheless, the EDB believes that while growth may decelerate, robust internal demand coupled with increased budgetary spending could reignite economic acceleration in the fourth quarter.

Industrial production stands out as a key driver of the Russian economyThe EDB estimates that industrial activities contributed approximately 1.3 percentage points to GDP growth this yearBetween January and September, the industrial output saw a notable year-on-year increase of 4.4%, with the manufacturing sector particularly thriving, witnessing a remarkable 7.9% growth due to escalating domestic demand

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However, disparities exist within the industrial sector; while some manufacturing fields have flourished, in stark contrast, sectors such as construction have stagnated, and mining and rail freight continue to experience long-term declinesExperts point out that the commitments to oil production cuts by OPEC and non-OPEC oil-producing nations (OPEC+) have led to a 2.6% year-on-year decline in Russian oil extractionMoreover, unplanned refinery maintenance has resulted in a 2.4% drop in overall refining output.

Demand in the domestic market has consistently outstripped supply, as confirmed by statements from the Russian Central Bank, which noted that the inability of the economy to effectively meet demand has perpetuated high inflation ratesData from the EDB indicates that from January to September, real disposable incomes of Russian residents grew by 8.6%, coupled with an expansion of credit, which in turn sustained strong household consumption growth

One significant factor contributing to income growth has been the rise in wages, reporting a 9.1% increase in real wages during the same timeframeThe mismatch between expanded production capacity and the shortage of qualified labor has been acute, with unemployment rates hovering around a historical low of 2.4% since June and capacity utilization exceeding 80%, marking a record highFurthermore, businesses' optimistic outlook regarding product demand has driven higher investment, with an 8.6% year-on-year increase in investments reported from January to September, despite facing challenges in supply and import payments.

Inflation remains a persistent issue, marked by aggressive interventions from policymakers aiming to curb rising pricesThe interplay between growing domestic demand and limited possibilities for expanding production has significantly influenced price increases, especially as inflation surged in the latter half of the year, where third-quarter inflation reached double digits

Contributing factors such as rising logistics costs and increased cross-border payment expenses have exerted upward pressure on import pricesAdditionally, escalating inflation expectations among households and businesses have perpetuated a self-reinforcing cycle of high inflationReports indicate a sharp rise in resident inflation expectations since May 2024, peaking at 13.4% in October, the highest since December 2023. Despite tightening loan policies, demand for loans remains elevated, with banks' loan portfolios increasing by 14.2% from the beginning of the year through SeptemberIn light of inflationary dynamics and growing budget expenditures, experts warn that inflation could worsen, necessitating more stringent monetary policyConsequently, the Central Bank has executed three interest rate hikes totaling 5 percentage points since the second half of the year, bringing the key interest rate to 21%, surpassing the previous high of 20% in March 2022. The EDB anticipates a possible further increase of 2 percentage points in December, pushing the rate to 23%.

The dynamics of import and export also warrant attention

Russia's current account balance is expected to remain in surplus, driven by a reduction in imports and relatively stable exportsA combination of complicated foreign trade settlements, rising logistics costs, and the expansion of import substitution industries has led to a 5.3% decline in imported goods year-on-year, while exports have maintained levels comparable to those recorded from January to October 2023.

Looking ahead, Russia's federal budget plans for the next three years suggest a stabilization of growth following a phase of rapid expansionThe government anticipates an average annual growth rate of 2.7% for the Russian economy over this periodThe Central Bank takes a more conservative stance, projecting a slowdown in GDP growth to between 0.5% and 1.5% in 2025, tapering further to 1% to 2% in 2026. From 2027 onward, sustainable balanced growth is expected to take shape.

While maintaining a growth trajectory, market analysts have observed a diminishing pool of factors supporting economic expansion

Reports indicate a contraction in domestic consumption driven by reduced personal loans, increased bank savings, accelerating inflation, and significant ruble depreciationAll these factors may negatively impact economic demand and inflation expectationsOverall, sustaining the trend of economic growth in Russia next year appears feasible, but the country is likely to face multiple risks.

Moreover, the risks posed by external sanctions remain high, complicating Russia's participation in the international economic systemThe escalating imposition of economic sanctions from Western nations continues to exert mounting pressure on RussiaRecent reports suggest that the United States is contemplating strengthening sanctions against Russian oil exports, with the White House poised to take "more aggressive actions." The newly appointed EU Energy Commissioner, Dan Jørgensen, remarked in an interview that his primary goal is to sever the EU's energy ties with Russia completely, declaring, "In fact, we can reduce our dependence to such an extent, which is truly a great achievement." The EDB warns that the potential for new trade restrictions against Russia remains significant, with additional constraints on cross-border settlements posing new risks to foreign currency earnings and imports of technological products

In this context, Russia faces the necessity of restructuring its supply chains, a process likely to amplify exchange rate volatility and necessitate the maintenance of elevated interest rates over an extended period, all of which will undoubtedly cast a shadow over economic growth prospects.

Additionally, the shortage of labor could impose considerable restrictions on economic growthThe Russian Federal Statistics Service reported an unemployment rate of 2.3% in November, a historical lowHowever, this low figure masks the accumulating risks of a labor shortageNovak remarked that there is a deficit of approximately 1.5 million highly skilled workers, particularly in the construction and transportation sectors, as well as in housing and public servicesAccording to TASS news agency, Novak emphasized, "Without professional talent driving the development of key industries, nothing will be effective." Elvira Nabiullina, the Governor of the Central Bank, has identified labor shortages as a primary concern for the Russian economy, pointing out that the low unemployment rate is a clear indicator of this issue, alongside the challenging situation faced by the machinery and chemical industries.