Russia Economic Forecast

Conditions improved slightly in Q1: Economic activity shrunk 2.2% year on year on average in January–March, on the back of softer declines in the industrial and retail sales sectors as inflation cooled and consumer demand recovered. On top of that, a large fiscal stimulus at the outset of the year should have supported an overall improvement. However, the mobilization of troops likely exacerbated labor shortages, thus partly offsetting the stimulus. Moving to Q2, strong PMI data suggests economic momentum improved further in April, with lower inflation boding well for domestic demand and export orders recovering somewhat. Lower global energy prices should have hurt the external sector, however. Meanwhile, the war in Ukraine continues to hurt the economy: Direct war-related costs, ongoing Western sanctions and widespread emigration all bode ill for activity.

Inflation dived to a one-year low of 3.5% in March (February: 11.0%). That said, the decline was chiefly due to a large base effect, with inflationary pressures expected to pick up again in the months ahead. Moreover, risks remain skewed to the upside due to a strained labor market, seemingly strong domestic demand, continuous Western sanctions and volatile commodity prices.