Executive Summary 

1. External environment has become dramatically less supportive. The most important change to Russia’ macroeconomic situation over the past 12 months has been the sharp deterioration of its external balance. In 2023, total goods exports reached $424 billion, a decline of 28% vs. the previous year. This has contributed to much smaller trade ($120 billion, -62%) and current account ($51 billion, -79%) surpluses and is fundamentally eroding macroeconomic stability. As a result of sharply lower inflows of foreign currency, the ruble has lost more than 40% of its value against euro and U.S. dollar since the fall of 2022. In turn, this has increased inflationary pressures and forced the CBR to hike interest rates by cumulative 850 bps as well as reintroduce capital controls. 

2. Signs of stepped-up energy sanctions enforcement having impact. Following a period during which the price cap’s shortcomings had become apparent and threatened the overall effectiveness of the energy sanctions regime, coalition authorities have stepped up enforcement measures, including by sanctioning individual shadow tankers. These measures have had an effect—the vessels have been sidelined, participants in the trade (e.g., buyers, traders, and banks) are becoming much more cautious as they may force enforcement actions themselves, and the discount on Russian oil vs. Brent has started to widen again in recent months. 

3. Macro buffers under stress due to the war and sanctions. While the 2023 budget deficit reached only 1.9% of GDP and rising non-oil and gas revenues allowed authorities to spend 3 trillion rubles more than originally expected, financing is set to become more challenging. With external sources cut off due to sanctions, Russia has had to rely primarily on the NWF. In fact, almost half of the fund’s liquid assets, including all hard currency, have been used up since the February 2022. Going forward, the Russian banking system will likely have to carry more of the burden. Sanctions have also significantly constrained access to reserves. 

4. Robust economic recovery conceals underlying vulnerabilities. The Russian economy is benefitting from a large war-related fiscal stimulus, with growth reaching 3.6% in 2023 according to Rosstat. At the same time, the statistics agency revised the 2022 contraction down to 1.2%. The stimulus will become even stronger this year as military spending could add around 2.5pp to GDP growth in 2024. Thus, it is not surprising that economic activity has essentially fully rebounded from the initial shock due to the war and sanctions. However, the underlying fundamentals of the economy are weak, and problems will eventually resurface.