The Bank of Russia’s Scenarios About The Russian Economy Looking Ahead
Russia will continue moderate economic growth with some bumps but a global economic crisis could be looming
The Bank of Russia has identified differing scenarios as concerns the future trends of the Russian economy; and is putting in place mechanisms to deal with these. These include a belief that sanctions against Russia will remain until at least 2026, while to keep inflation in check, the key rate may be raised to 9.5%. The Russian economy will be able to return to sustainable growth of 1.5 – 2.5%. The overall risk scenario however contemplates a deterioration in the global financial sector and could result in a global crisis comparable in scale to the crisis of 2007-2008. We analyse both of these theories.
Russia’s Base Economic Scenario 2024-26
Geopolitical difficulties, as well as the restrictions imposed against Russia, will continue in 2024-2026, and follows the main directions of Russia’s unified state monetary policy for 2024-2026.
“The baseline scenario does not imply a significant change in geopolitical conditions until the end of the forecast horizon. The imposed external restrictions on Russian exports, imports, investment and technological cooperation remain in the medium term.”
In addition, the baseline scenario of the Bank of Russia assumes that the West’s Central banks will fight inflation and pursue a tight monetary policy. As a result, global economic growth will slow down, and this will limit the demand for Russian exports.
According to the Bank, Urals oil prices in 2023-2026 will be about US$55 per barrel. Gas prices in 2024 will be higher than in 2015-2021, but will begin to decline in 2025-2026.
The recovery of the Russian economy will be more moderate than in 2023, the Central Bank predicts. The economy will return to a balanced growth of 1.5-2.5% only in 2026.
Annual inflation will return to the target of 4% in 2024. To do this, the Bank of Russia plans to keep the key rate in the range of 7.9–8.3% per annum in 2023 and 8.5–9.5% per annum in 2024. In the future, as inflationary pressure eases, the Bank of Russia will reduce the key rate, returning it to the long-term neutral range, which is estimated at 5.5–6.5% per annum.
Geopolitical complexities are mounting, the global economy is becoming more fragmented, and the Russian economy is trying to adapt to new sanctions.
“Countries are increasingly divided into blocs, more and more industries are moving back to their territory or to friendly and geographically close countries. For the Russian economy, in addition to worsening terms of trade in general, this also means a likely increase in sanctions pressure.”
As a result, the growth of the global economy in 2024-2026 will be even lower than in the baseline scenario. Russian exports will face new challenges.
Urals oil will start to get cheaper, by 2025 its price will drop to US$45 per barrel and will remain at this level until 2026. Russian exports will shrink, as a result the growth rate of Russian GDP in 2024 may turn out to be zero (or even negative), only returning to growth in 2025.
Sanctions pressure will lead to a reduction in imports. Because of this, the gap between supply and demand will increase, and prices will creep up. In this scenario, the Central Bank expects inflation in 2024 at the level of 5-7%, and the key rate up to 11-12%. Because of this, the number of consumer loans may be sharply reduced.
Increased fragmentation and new anti-Russian sanctions will add difficulties in the global financial sector, which could lead to a global crisis. After almost 15 years of near zero period, Central banks are increasingly raising key rates, the Russian Central Bank points out. This will lead to an increase in demand for risky assets, as well as a decrease in the value of traditional and reliable assets, such as government bonds and real estate.
Global Risks & Consequences
The second risk is related to the fact that with an increase in rates, debt servicing costs and the cost of refinancing it may increase for reserve currencies this has consequences on the international capital market, the Central Bank points says. As a result, credit risks and sunk losses increase for financial institutions.
“The heightened optimism currently seen in the markets could quickly give way to uncertainty and a massive divestiture of risky assets. The realisation of interest rate risk for several large market participants may lead to increased uncertainty and a decrease in confidence in the financial system as a whole, may cause a domino effect and result in a global crisis comparable in scale to the 2007-2008 crisis.”
Global demand will fall sharply due to a recession in the two largest economies: the US and the EU. Because of this, oil prices will drop to US$30 per barrel by 2025.
The Russian economy will shrink for two years, the level of GDP will decrease, and the budget will have to support business as in the pandemic 2020. In 2026, the economy will grow at a recovery rate of 2.0-3.0%, and then it will move to balanced growth.
In the first year of the shock, inflation will rise to 11-13%. In order to keep prices rising, the Bank of Russia will raise the rate in 2024 to 12.5-13.5%. They will begin to reduce it by the end of 2024, but monetary policy will remain tight. Lending in the country will sag. But as the rate cuts and the global economy improves, the pace of lending will accelerate and approach the baseline by 2026.
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