Russia’s economic recovery in consumer and business demand has improved consistently each month since the beginning of the year but will gradually ease by mid-2022 as pent-up demand is exhausted, and the economy normalizes. A moderately stronger ruble and higher energy prices are driving up state expenditures and therefore support to the economy, sustaining business demand.
However, structural limitations like weak wage growth and investment, high costs, and a more uncertain COVID outlook will restrain growth potential. Also, with the Duma elections over, the Kremlin is likely to impose harsher COVID-related restrictions to accelerate the extremely low vaccination rates, impacting sentiment and routes to market.
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Consumer spending will continue to accelerate until hitting structural constraints in early 2022
As the labor market has effectively recovered from the pandemic, consistent growth in real incomes matched with solid credit growth and strong ruble performance will help further revive consumer confidence and spending throughout through the beginning of 2022. However, rising COVID cases and the potential for QR codes or other restrictions meant to induce vaccination in Q4 would weigh on sentiment, as it did in July 2021. Firms will have to manage higher costs and increased price sensitivity, as inflation remains elevated throughout the first half of 2022.
Spending in 2022 will likely be above the increased expenditures in next year’s budget
Government revenues increased throughout the first half of 2021 on the back of a strong uptick in oil and gas revenues. Despite the planned cut to expenditures in the 2021 budget, total spending has in fact expanded and is likely to be notably higher than initially planned next year. Aiding revenues, the government plans to introduce several tax hikes, including a higher property tax, cuts to the duty-free threshold, a higher tax on mineral extraction, and a higher excise tax on alcohol and sugary drinks.
Strong improvements in investment in Q2 have pushed output to its peak into Q3
Rising business confidence for the past year reached its peak in Q3, helping drive up investment and output, though we expect this trend to moderate by the end of the year. Persistently higher cost pressures and exhausted pent-up demand as the economy normalizes will slow B2B demand in early 2022, with the additional risk of increased COVID restrictions. The auto, construction, and food sectors have accelerated, while agriculture has slowed minimally this year. However, high costs have begun to weigh on confidence and will limit demand potential in the coming months.
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