Russia’s macro health hides chronic deficiencies

The Kremlin has long denied rumors about Vladimir Putin’s health. A bigger challenge is dispelling concern about the economy.

Predictions of immediate collapse have proven wrong. It is true that GDP contracted by 4% year-on-year in May. But unemployment fell to an all-time low. High energy prices have caused EU countries to send $70 billion to Russia since February. And the fall in imports gave it a record current account surplus, also of 70,000 million, in the second quarter.

As in the last big crisis in 2014, the skillful management of the central bank governor, Elvira Nabiullina, has helped. Following the invasion, she doubled rates to 20% and instituted capital controls to prevent a bank run. The ruble has recovered against the dollar, which has allowed it to reduce the rate to 8% (on Friday).

But the war has caused the economy to go from stagnation to degradation. Even the central bank’s July survey of economists forecast a contraction of 6% this year and 1.3% next, before returning to stagnant growth in 2024 and beyond. Productivity will fall in the long run, because the sanctions are prohibiting or discouraging imports of machinery and technology, which make production more efficient. Russia could redirect to China and India much of the 3 million barrels of oil a day that Europe will stop importing, but redirecting all the gas will be impossible without new pipelines.

For the economy to get on a more stable path, it will have to substitute imports for home-made products and reverse the decline. It has a poor prognosis. Rebalancing requires investment and well-functioning markets, something Putin has not been able to achieve in two decades, even when markets were buoyant. Corruption and poor respect for the rule of law have long held back investment, and the war has exacerbated the brain drain. No amount of clever macro policy will fix these problems in the short term.