Russia’s economy proves resilient despite sanctions

MOSCOW: Russia's economy is growing despite sanctions imposed by the West and Moscow looks set to continue its war in Ukraine. 

The Kremlin remains confident of continuing to finance the conflict, with experts predicting gross domestic product (GDP) to grow between 1 and 3 per cent next year.  

Last month, President Vladimir Putin signed a budget for the next three years that will boost defence spending to about 30 per cent, double the 15 per cent before the invasion of Ukraine in February last year.

This comes even as European leaders are contemplating another round of sanctions meant to pressure Moscow into stopping the war. 

Russia is currently the most sanctioned country in the world. 

Some observers say measures taken by the West do not seem to be working, and Russia’s financial future looks optimistic. 

“Taking into account the fact that the Russian budget has been growing, it is quite balanced, given that oil and gas revenues still allow for investing within the country”, said Ingosstrakh Investments CEO Semenikhin Roman.

However, Professor Igor Yushkov at Financial University under the Government of the Russian Federation, pointed out that the oil and gas industry has begun to bring in “significantly less budget revenues”. 

“The share of oil and gas budget revenues is declining and will be even less than 30 per cent. It used to fluctuate between 40 and 50 (per cent) for many years, " said Prof Yushkov, who is also a leading expert at the country’s National Energy Security Fund.

RUSSIA TURNS INWARDS

To cope with the sanctions, Russia has been weaning itself off Western suppliers and sources and turning inwards to domestic sectors, which are growing as a result.

Among them is the local fashion and retail sector, which rushed to fill the gap left by foreign brands that pulled out of Russia in protest of the invasion.

Russian fashion brands are now renting more than 85 per cent of the space previously occupied by large international fashion retailers at shopping malls.

These local companies are growing in size and output, as Russian consumers look for substitutes to what they used to buy from foreign retailers.

Mr Sergey Fedunev, brand manager of local brand Daniil Antsiferov said: “Now the fashion market in Russia is growing. The consumers are ready for new brands and prices.”

Sales of Russian clothing manufacturers increased by 19 per cent in the first seven months this year. It appears the upward trend is set to continue. 

A survey by independent analytical pollster NAFI showed that 85 per cent of Russians want new, strong local brands to emerge.

"The mass market is growing very well, those companies which had a network, had an understanding of how to produce, set up business processes and managed to assemble a team have created a new, very strong brand,” said Mr Aleksey Bazhenov, founder of Be In Open fashion institute.

Many local clothing producers said they have pivoted from western suppliers to those who have better ties with Russia. 

They are also using alternative ways to promote themselves, including tighter collaboration with local influencers, after many Western social media platforms were blocked inside the country.

“We face some problems with logistics, material, specialists etc. But this is business, it’s a normal process in business,” said Mr Fedunev.

LABOUR SHORTAGE FOR BUSINESSES

While a boost in the domestic sector has appeared as a bright spot for Russia, firms are facing a labour shortage with thousands of people sent to the frontline. 

A recent survey by recruitment website Superjob found that 85 per cent of Russian companies are experiencing labour shortage.

Restaurants in particular said they are constantly struggling to find enough workers. 

President of the Federation of Restaurateurs and Hoteliers of Russia Igor Bukharov said that the industry is at least 25 per cent short on manpower.

"There's a lack of qualified staff. The number of schools that educate qualified chefs is simply not enough. We lack qualified specialists. Even if they don't have a lot of experience. But there are just not enough good certified specialists,” said Mr Kirill Martynenko, managing partner at eatery Torro Grill.

There is also a lack of taxi and delivery truck drivers, medical staff, manufacturing and IT engineers in the nation.

Analysts said that Russia is transiting from being a place with a cheap, abundant workforce to a market of expensive labour and staff shortage.

"This deficit will not disappear by itself,” said Ms Elena Kuznetsova, a partner at international consulting firm Yakov and Partners. 

“The economy demands even more jobs, qualified jobs, because manufacturing is growing, there are all kinds of import substitution projects going on, there are transportation projects.”

The authorities acknowledged that labour shortage is becoming a real problem and urged increased productivity.

INFLATION AN ISSUE

Inflation has also emerged as a problem in the country. 

Russians say they are seeing a significant increase in the price of basic staples, including food, medicine and clothes.

“In the short- and medium-term, we are doing great, from an economic point of view. On the other hand, we have negative aspects related to overheating,” said strategy director at investment firm Finam Yaroslav Kabakov.

“In fact, as everywhere else - overheating wage growth, including the segment related to the military-industrial complex, the special military operation - there is quite significant wage growth, which is leading to an increase in consumer inflation.”

Inflation is expected to fall to around 7 per cent by the end of this year compared with nearly 12 per cent in 2022, and is forecast to drop even further to 4 per cent in 2024.