European Commission Revises Russia's Economic Forecast: Growth Expected in 2023-2025

• Financial

The European Commission (EC) has significantly revised its economic forecast for Russia, predicting growth in the coming years rather than the contraction previously expected. This shift in outlook reflects changes in global economic dynamics and Russia's ability to adapt its export strategies.

From Contraction to Growth: Russia's Economic Outlook

In its Autumn 2023 Economic Forecast, the EC has adjusted its projection for Russia's Gross Domestic Product (GDP), now anticipating growth of 2% in 2023, up from an earlier forecast of a 0.9% contraction.

Furthermore, the Russian economy is expected to grow by 1.6% in both 2024 and 2025. This update marks a significant change from the May 2023 document, which had projected an economic contraction in 2023 and a modest growth in 2024.

The report credits Russia's success in diverting a large portion of its exports, particularly commodities, to new markets such as China and India. However, it also notes that voluntary oil production cuts and challenges in replacing European gas markets are likely to constrain export recovery later in the year.

Inflation Trends and Fiscal Policy

Despite the growth forecast, the EC anticipates persistent inflationary pressures in Russia for 2023, with consumer inflation expected to reach 6%. The report projects a gradual decrease in inflation to 4.6% in 2024 and 4.0% in 2025, attributed to tight monetary policy and a slowing economy.

Inflation in Russia declined to a three-year low of 2.3% in April, primarily due to base effects. However, it began accelerating in the subsequent months, driven by high wage growth in a tight labor market and robust domestic demand fueled by fiscal expansion.

Budget and Defense Spending

The EC’s experts project Russia's federal budget deficit to exceed 2% of GDP in 2023 and to remain roughly at this level in 2024. Notably, defense spending is expected to surge to about 6% of GDP in 2024, accounting for a significant portion of the total budget.

Despite this, the budget is anticipated to remain under control, with the government demonstrating its ability to address revenue shortfalls through various measures, including windfall taxes on energy companies. The EC's revised economic forecast for Russia suggests a more robust economic performance than previously expected, despite ongoing global challenges and geopolitical tensions.