OECD Russia and Central Asia 1/2022

Russia

Update on the latest developments

Despite the surge in Omicron cases, Russia’s economic recovery remains on track, supported by commodity prices. Labour market indicators suggested less pressure as the unemployment rate remained unchanged at 4.3% in November 2021 compared to August 2021. Meanwhile, industrial production grew 7.0% y-o-y in November 2021, easing from downwardly revised growth of 7.4% in the previous month. On a monthly basis, industrial activity rose 0.5%, and during the January-November 2021 period, the growth was 5.2% y-o-y. On the consumption side, retail sales growth eased to 3.1% y-o-y in November 2021 from 4.1% y-o-y in October 2021 as fiscal handouts provided prior to the Duma elections in September ended.

On the inflation front, the consumer price index fell slightly to 8.39% y-o-y in December 2021, from 8.40% in November 2021. In 2021, inflation rose to a level that is more than twice the central bank’s target of 4%, amid the rapid economic recovery from the COVID-19, labour shortages across many industries and ongoing supply chain disruptions. Moreover, food prices might increase further in 2022 following a weaker-than-expected agricultural season.
In response to these inflationary pressures, the Russian central bank raised its benchmark policy rate by 100 bps to 8.5% in December 2021, the highest since September. A further key rate increase at its upcoming meeting is most likely considering the monetary policy stance to bring down inflation to
4.0-4.5% by late 2022.

Near-term expectations

In 2021, Russia’s economy was back to pre-pandemic levels and the short-term outlook is more resilient and optimistic, supported by the increase in commodity prices and the relative decline in COVID-19 infections. However, the uncertainties related to the current global increase of Omicron cases, as well as the global supply chain disruptions and a slow rate of vaccination, might hinder this progress. Moreover, elevated inflation might add another downside risk, as it may lead to secondary effects, such as a lowering of individual savings and exports.

Recent PMI indictors signalled a slowdown in private business activity. Indeed, the manufacturing PMI fell to 51.6 in December 2021 from 51.7 in the previous month. Yet it marked the third-straight month of expansion in the manufacturing sector, amid steady growth in output and new orders.

By contrast, the services PMI increased to 49.5 in December 2021 from 47.1 in November 2021. However, the index has been within contraction territory for three-straight months amid further COVID-19 restrictions.

Considering the developments in fossil fuels, Russia’s 2021 and 2022 GDP forecasts have been kept unchanged from last month at 4.0% and 2.7%,
respectively. In addition to the trajectory of Omicron infections and the overall increase in prices, recent political developments in the region might add another recovery risk factor.