Opinion – Vinicius Torres Freire: How Russia still makes money, but its economy is already sinking

The Russian currency is worth as much as the week before the start of the war. One dollar bought 77 rubles on Wednesday, April 20, compared to 75 rubles in the days before the invasion of Ukraine. The dollar came to cost 120 rubles in March. Data are from the Central Bank of Russia (BCR),

The BCR’s basic interest rate, their Selic, went from 9.5% to 20% on February 28. On April 11, it dropped to 17%.

Russia’s external account surplus had not been this good in years. Sales of goods and services, exports, exceeded imports by US$ 66.3 billion in the first quarter of this 2022. In the first quarter of 2019, they were US$ 41.1 billion.

It’s all true. But Russia is on the rocks.

Images of queues at the ATM and snatching of goods in stores almost disappeared from the “pop” news, for fear of shortages. But the economy sinks.

The ruble exchange rate is kind of an illusion. There is almost no market for the Russian currency and the government has imposed capital controls (that is, it says what to do with the hard currency, dollar, euro, that enters the country). Russia has a huge balance in its external accounts because of its oil and gas exports and because it imports less.

Money comes in, but doesn’t come out, for the worst reasons.

Inflation in March was 7.6% (compared to February), higher than the full-year 2021 price rise (6.9%).

The industry has been shrinking since February. In March, it regressed at the fastest pace since the shock of the epidemic, according to an industry conditions survey (S&P PMI).

In February, according to a GDP estimate (of five main sectors), the economy was already shrinking 1.3% compared to February 2021, says the company that gives official advice to the Ministry of Finance. The industry fell 3% in February. There are no official data for March.

According to the IMF’s guess, Russian GDP should fall by 8.5% in 2022. Banks and major financial consultancies in the world guess something around 11%. Cumulatively from the Great Recession of 2015-16, Brazil’s GDP fell by 6.7%.

We are yet to see GDP estimates hit the mark, but Russia has and will have problems, unless in a fantasy world where Vladimir Putin or the Russian political system surrenders to the “West” quickly. In addition to the brutal shock of confidence, inflation, high interest rates, the stampede of Western companies, the fall in foreign investment and credit, parts, technologies and supplies for the industry will be lacking.

Europe will decrease Russian energy imports. Even if it wants to, China won’t be able to plug these holes. Etc.

In the short term, these weird things happen, appreciation of the ruble and a bigger surplus in the external accounts. Russia makes money even with Russian oil (the Urals type) being sold at a deep discount to the Brent type. The difference was US$28 in March this year (24%), according to the government, and around US$37 in the last week. As of March 2021, the difference was less than $2 (3%).

Russian hard currency and gold reserves have only dropped from $643.2 billion (as of February 18) to $604.4 billion (April 8). About half were confiscated by the Western Act of War.

It may be that, given the balance in the external accounts, Russia will recover the loss of confiscation in little more than a year, “all else being equal”. It won’t do much good, in terms of real economic performance.

Money comes in, but doesn’t come out, for political reasons (sanctions), desperate economy (capital control) and because of recession (care less about poverty).