Executive Summary 

1. Russia’s economy far from inflection point. Sanctions continue to have an impact on the Russian economy, in particular external dynamics and budget revenues, but the country is not approaching any inflection point that would force it to stop its war of aggression in Ukraine in the near term. For this reason, Ukraine’s allies should step up pressure significantly in the coming months. 

2. Oil sanctions have effect, but more is needed. International sanctions have significantly impacted Russia’s exports and budget: Export earnings in H1 2023 were down one-third (both vs. H1 and H2 2022), while revenues from oil fell by 23% vs. H2 2022 and 46% year-over-year. However, Russia continues to earn large amounts of money from oil: $425 million per day in January-June. 

3. External environment increasingly challenging. In line with lower oil sales, overall goods exports have fallen by one-third in H1 2023 (year-over-year). As imports are close to pre-sanctions levels, this means a dramatic decline in trade balance—$54.3 billion in H1 2023 vs. $179.8 billion a year ago (-70%)—and current account surplus—$20.2 billion vs. $147.6 billion (-86%). 

4. Macro fundamentals drive Ruble depreciation. At ₽90/$ and ₽100/€, Russia’s currency has lost a large share of its value since last fall—39% against the dollar and 47% against the euro. Significantly lower inflows of foreign currency due to the drop in exports are the key driver. The weaker ruble raises the risk of upside pressure on inflation as costs for imported goods increase. 

5. Reduced spending leads to lower budget deficit. The federal government deficit declined considerably—from 3.4 trillion rubles in January-April to 2.6 trillion in H1 2023. Revenues from oil and gas still underperform (-47% vs. H1 2022)—but other revenues are up, and authorities have managed to reduce spending. As a result, we lower our deficit forecast for full-2023 to ~5% of GDP. 

6. Financing challenges reduced, buffers to last longer. Should Russia manage to keep expenditures stable at current levels, withdrawals from the NWF and new issuance of domestic debt are unlikely to pick up significantly in coming months. With the NWF also benefiting from a weaker ruble via valuation effects, critical macro buffers will last longer than previously expected. 

7. Russia’s economy continues to recover. Fundamentally, the economy is close to fully bouncing back from the initial sanctions shock—Q1 2023 real GDP is only down 1.8% year-over-year. While questions about the reliability of Russian data are legitimate, a variety of indicators—including high-frequency activity and sentiment measures—paint a consistent picture.