Russia is diversifying AND recession is thumped.

Russia is seeking to spend its way out of the self-inflicted economic crisis that threatened to deliver the deepest recession of President Vladimir Putin’s more than two-decade rule.

Roaring exports of commodities funneled capital into the coffers of the government and companies, feeding an upswing in business investment that was without precedent during previous economic contractions and proved crucial to powering the war effort in the year since the invasion of Ukraine.

Companies big and small spent to replace foreign equipment and software or channeled money into building new supply chains to reach alternative markets. Facing initial forecasts for a decline of up to 20% in capital expenditure, Russia instead saw it increase 6% in 2022, according to Bloomberg Economics.

[fig omitted]

But just as tighter curbs on exports choke off revenue to the Kremlin, the future is also far more perilous for investment. Although the central bank and Russia’s Economy Ministry anticipate a period of stability or only a slight decline, Bloomberg Economics predicts fixed-asset investment will shrink by 5% in 2023 — a major drag on an economy that’s expected to contract 1.5%.

A decrease in corporate earnings and pressure from sanctions will halt the momentum and contribute to the uncertainty that’s likely to lead to a spending slump, though smaller in scale than first forecast for 2022, according to Olga Belenkaya, economist at Finam in Moscow.

“It appears that investment backed by the government and state corporations may increase further, but private sector investment is set to decline,” she said.

Invest to Survive

The resilience last year was a matter of survival for companies that now needed to endure what the central bank calls a “structural transformation” of an economy besieged by sanctions. The Bank of Russia has said that the vast majority of businesses either boosted investment or kept it unchanged in 2022.

That helps explain why output contracted only 2%, far short of the economic collapse predicted in the immediate aftermath of the invasion in late February.

What Bloomberg Economics Says...

“Russia’s recession is unlike any before it. During a typical downturn, private investment takes the biggest hit, while household consumption declines less. Not this time. We estimate this anomaly will disappear in 2023 as high uncertainty and the risks of doing business in Russia depress investment.”

—Alexander Isakov, Russia economist. For more, click here

As Russia tried to cope with shortages caused by sanctions, new private businesses sprouted up, many backed with state loans or subsidies.

In the Pskov region of western Russia, a factory is expected to churn out industrial batteries to help replace imports. A chemical enterprise launched in Chuvashia on the Volga plans to make hydrogen peroxide in volumes that should meet domestic demand in full. Near Moscow, facilities started to produce hydraulic equipment and pharmaceuticals.

Maria Romanovskaya is among entrepreneurs now waiting for state support to materialize after investing her own money last year to found a cosmetics producer after the exodus of Western brands. She applied to the government for funding, with plans to invest in building out facilities and switch from contract manufacturing to develop her own full semi-automatic production line.

“There was some gigantic amount of money allocated for this,” she said. “We were eligible for two programs of state support, and we applied for one.”

[fig omitted]

The disappearance of many imports has become one of the forces warping Russia’s wartime economy, driving growth based on less sophisticated technology toward what its central bank termed “reverse industrialization.”