We expect Russian GDP to decline by only 0.8% in 2023, followed by a moderate 0.9% rebound in 2024, reflecting the economy’s greater-than-expected resilience in face of the repercussions of the war in Ukraine. Our previous forecast was for a 4% contraction this year.

Our outlook is more pessimistic than the IMF’s latest forecast for 0.3% growth, itself revised from a previous forecast for a 2.3% contraction, and the Russian government’s projections for growth of 1.2% in 2023 and 2% in 2024. We recognise the difficulty of making accurate forecasts given the continuing war in Ukraine and lack of transparency in Russian official data.

The recession in 2022 (-2.1%) was milder than the pandemic-related downturn in 2020 (-2.7%) and similar in severity to that of 2015 (-2.0%) after Russia’s annexation of Crimea. Windfall gains from high energy and other commodity prices coupled with astute monetary and fiscal policies to counteract sanctions, partly through strict controls to prevent capital flight, have helped sustain economic activity.

However, hefty state spending is making a significant contribution to supporting near-term growth (Figure 1), resulting in widening budget deficits, without improving Russia’s long-term growth potential given the war, the sustained impact of sanctions and lower energy revenues.  

Government spending surged 26% in rouble terms last year, while revenue increased by only 10%, resulting in a deficit of 2.3% of GDP compared with a surplus of 0.8% of GDP in 2021. The Russian Treasury reported a fiscal deficit of RUB 2.4bn in Q1 2023 (down from a RUB 1.1bn surplus over the same period last year), amid falling oil and gas revenue and rising defence spending.

Figure 1. Consolidated government fiscal position
RUB bn (LHS), % of GDP (RHS)

Source: Russian Treasury, Scope Ratings

Budget deficit to widen in 2023

We expect this deterioration to continue this year, as lower global energy prices reduce oil and gas export receipts in the context of the G7’s oil price cap on Russia crude and the EU’s diversification away from Russian natural gas.

We forecast a budget deficit of 3.8% of GDP in 2023, compared with the present official forecast by Russia of a 2% deficit, before narrowing to 2.8% the following year amid weak growth and high military spending.

The current fiscal stimulus prioritises support for producers, benefiting sectors such as construction and transportation, partly to accommodate redirected trade flows. Increased defence spending has also played a significant role in strengthening manufacturing. However, the growing reliance on defence-related manufacturing reduces the diversification of the Russian economy, in turn weighing on the sustainability of economic growth.

To be sure, Russia’s debt-to-GDP will remain moderate in the medium term, increasing to about 23% by 2024 from 19.6% in 2022. This projection considers the impact of sanctions which limit the government’s ability to tap international capital markets and restrict its borrowing capacity.

Inflation clouds medium-term economic outlook

Persistent inflation remains a drag on Russia’s growth. Price pressures have moderated over recent months, in part reflecting favourable base effects, but consumer-price inflation will average around 6% in 2023, with price rises accelerating in the second half of 2023.

Underlying price pressures are exacerbated by labour shortages, resulting from the mobilisation of working-age men for the war in Ukraine and accelerated emigration which reached a high of around 1.3m people in 2022. Fiscal stimulus is fuelling inflation too. Consumer demand is vulnerable to possible future supply shocks and further escalations in foreign sanctions.

Figure 2. Headline inflation has eased, underlying price pressures remain


Source: Central Bank of the Russian Federation, Rosstat, Scope Ratings

Asian markets provide some relief from Western sanctions

The increasing influence of Asian economic powers, particularly China (A/Stable) and India, has offered Russia alternative trade routes and markets. This development has helped to lessen the impact of Western sanctions, providing some support to the Russian economy.

Nevertheless, a significant portion of export receipts remain outside of the local foreign exchange market following this redirection of trade flows. The recent suspension of talks with India to settle bilateral trade in rupees illustrates the complexity of circumventing the dollar-dominated global payment system.

The increased reliance on energy exports amid sanctions, which have resulted in significant price discounts for Russian oil and led to a fragmentation of Russian exports, also reduces the potential for trade to drive economic growth higher. Moreover, the recent decline in Russia’s current account surplus can be attributed to both the effectiveness of the oil price cap in limiting hard currency earnings and Russians’ access to a wider range of imports despite sanctions.

Finally, the militarisation of the economy makes it harder to address pre-existing structural challenges exacerbated by the war, including weak investment, low productivity growth and adverse demographic trends, limiting the Russian economy’s growth potential.