As a consequence, according to the Bank of Russia, the trade surplus for goods and services in Russia reached a historic high between January till July, rising from USD 75.7bn to 192.4bn, or 2.54 times. The government and the Bank of Russia commented that this confirmed Russia’s immunity to sanctions, but I would not venture to say that a foreign trade surplus—which occurred many times in the past—can be seen as a guarantee of the country’s economic well-being.
Previously, with oil prices above or around USD 100/barrel, the Russian federal budget was never in deficit. However, in 2022, when global oil prices were close to historic highs and gas prices were setting new records almost every month, it will not be possible to reconcile the budget with the surplus. In July, the budget deficit totalled 892 billion roubles and, in all likelihood, the surplus experienced in the first six months of the year will hardly be seen by mid-September. The current spending on the war in Ukraine will clearly not be reduced, and the need to replenish stocks of lost equipment and expended weapons will call for an increase in allocations to the military industrial complex (not to mention the need for huge spending to reconstruct the occupied territories and ensure supplies for the new ‘Russian citizens’). The combination of a high foreign trade surplus (more than USD 60bn per quarter of a year) and a chronic deficit in the federal budget is unique in the history of modern Russia. As such, it will presumably become the ‘new normal’ for at least the next year or two.
The most difficult situation will be seen in equipment manufacturing, car manufacturing, transport engineering, oil and gas, coal mining, timber processing and freight transport. The degradation of these sectors will largely be masked by good foreign trade performance and high export inflows into the federal budget, which will continue to finance social spending and subsidies to the regions.
We must also look at the period which ensued after the initial impact of the crisis. In the previous crisis situations, exports (primarily of Russia’s traditional commodities) were among the main drivers of recovery and growth because the rising commodity prices with a relatively ‘even’ scale of supplies to the global markets proved to be the most important source of rising revenues for the country’s budget and the corporate sector alike. However, such a course of events is unlikely in the current situation: on the one hand, the global economy is slowing down (also due to the war unleashed by Vladimir Putin), and as it cools off, prices for most resources supplied by Russia will go down rather than up (contrary to what happened in 2010−2011 or 2016−2017). On the other hand, even the approved plan to extend sanctions against Russia (with unplanned sanctions potentially being added to the bunch) will force Russian suppliers out of their traditional European market, which will further knock export volumes and reorient export towards markets with lower margins (in fact, Russian oil has already been delivered to India at a 30% discount, and discount rates are certainly there to stay). Thus, one should not hope that—as was the case after 2009 and 2014—the Russian economy will emerge from the current crisis thanks to a new ‘export wave’.
Today, it is clear that import substitution, which would enable the economy to achieve a substantial level of self-sufficiency (rather than simply providing a high share of value added locally while remaining dependent on critical components), cannot be achieved. This means that the government will have to rely on the so-called ‘parallel import’, which implies more complicated logistics routes and a whole chain of intermediaries. This will significantly drive prices of the supplies versus the pre-crisis levels (the price increases will average about 20−25%, also because many goods cannot be purchased from the manufacturers in bulk quantities). As a result, the record foreign trade surplus achieved in the summer of 2022 may shrink radically already by the end of 2023, as all of the discussed export restrictions come into force, ‘parallel import’ expands, and the industrial sector, which has almost stopped its imports now, faces the need to renew equipment.
This tactic is now showing impressive outcomes, with a cheap dollar and a huge surplus. At the same time, however, this tactic is laying the groundwork for future strategic defeat because of rising prices on the domestic market (today, Lada Vesta costs 2.4 to 3 million roubles, or 40−50 thousand dollars, versus 1−1.1 million roubles, or 14−16 thousand dollars back in January) and ground being lost on foreign markets (in niche positions and price points). While revelling in the gas price in Europe, reaching USD 3,000/thousand cu m, and record-breaking successes in foreign trade, the Russian authorities and the country’s experts fail to see the emerging the combination of factors that will lead the country’s economy to a full-blown disaster as early as in 2024−2025.