KSE Institute released its October Russia Chartbook, “Macroeconomic Situation Shows Signs of Improvement, Sanctions Need to Be Tightened” providing an overview of Russia’s economy, foreign trade, fiscal and monetary policies. It emphasizes that the Russian economy is recovering after the initial shock caused by the war and sanctions. It is critical, therefore, to strengthen sanctions, especially in the energy sector – to reduce access to foreign currency and Russia’s ability to increase military spending. 

To safeguard the credibility of the sanctions policy, immediate action must be taken to address the issue of price cap compliance. Furthermore, the key mechanism through which oil sanctions work–the discount of Russian exports vs. global prices – is under threat. The spread to Brent was $40 per barrel in January 2023 but has now fallen to below $14 per barrel in September. Partially, this is due to Russia’s building up of a “shadow” tanker fleet, which allows it to work around the price cap.

In September 2023, Russian oil export earnings reached $18.8 bln, the highest since July 2022, and the current account surplus in Q3 2023 rose to $16.6 bln (compared to $9.6 bln in Q2 2023). Should foreign exchange inflows rebound further and budget revenues continue to rise, the Kremlin will be able to pursue a more flexible monetary and fiscal policy in the face of war and sanctions. 

While a 50% drop in the ruble’s value since last fall is indicative of a less supportive external environment, it helped to reduce the federal budget deficit– to RUB 1.7 trn during January-September 2023, which is broadly in line with the original target. This improvement will enable the Kremlin to significantly increase defense spending next year – by 68% growth vs. the estimated 2023 outturn.

Overall, the Russian economy is gradually recovering. According to Russia’s central bank, the IMF, and the World Bank, Russia’s real GDP is projected to increase by 1.6-2.2% this year. In 2024, growth is expected to reach 1-1.5%. However, the recovery of business activity may be hampered if the ruble depreciates further, prompting the CBR to raise interest rates again.