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Cherry-picking with Mishustin Russia’s prime minister to Putin: ‘The economy is definitely recovering.’ Putin: ‘Is that so?’ Russian economy: ¯\_(ツ)_/¯

Source: Meduza
Alexander Kazakov / Planet Pix / ZUMA Press Wire / Scanpix / LETA

Late on July 5, the Kremlin press service announced that Vladimir Putin had been briefed on the state of Russia’s economy by Prime Minister Mikhail Mishustin. Meduza’s special correspondent Margarita Liutova takes a close look at the economic report presented by Mishustin to the president and explains where the minister got his figures, what stands behind them, and what’s missing from the rosy picture of Russia’s unstoppable GDP growth.

In his Wednesday report, Mikhail Mishustin presented Putin with a score of Russia’s economic achievements, both current and projected for the future. First, the minister informed Putin about the healthy growth of Russia’s GDP: “The country’s economy is definitely recovering, despite the sanctions and obstacles in its way. Just as I was preparing to meet with you, I looked at the figures. Over the past five months, our GDP has increased by 0.6 percent. But what really matters is the 5.4 percent difference from May [2022] to May [2023],” he said.

Mishustin was referring to the monthly GDP estimates, calculated by Russia’s Ministry of Economic Development. Most countries don’t publish official monthly GDP statistics, and this is also true of Russia’s statistics agency Rosstat. Those who do, like the British Office of National Statistics, explicitly disclaim the volatility of monthly GDP figures. That volatility makes monthly figures unreliable in projecting long-term trends — something better done on the basis of quarterly reports.

The way Russian economists see these figures is clear from the course materials on economical statistics published by the Moscow-based Higher School of Economics. Their authors point out that monthly GDP figures can be useful in short-term decision-making, but cannot contribute to reliable long-term projections. While Mishustin was right to say that Russia’s economy is growing, what he didn’t say is that its pace of growth cannot be deduced from monthly figures alone. First, this is because running GDP reports can be corrected retrospectively, on the basis of more complete data (which takes time to compile); the margin of error in operative data can be significant. Second, monthly GDP data can only be analyzed once it’s been adjusted for seasonal and payroll-related factors that can affect the number of business days and overall productivity in a given month.

Russia’s Ministry of Economic Development admits that the May pace of economic growth was particularly impressive compared to 2022 because May 2022 itself had been a disaster. The second quarter of 2022 was when Russia’s economy started to feel the shock of the full-scale war and the sanctions. Based on running GDP statistics compiled by the ministry itself, the May 2022 GDP corresponded to a 4.3-percent annual GDP contraction. This is something Mishustin chose not to bring up in conversation with the president.

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The ministry’s press release reports a GDP growth of 1.4 percent in May, when compared to the preceding April and adjusted for seasonal factors. This is a better estimate, but it doesn’t look nearly as good as 5.4-percent growth, which could well be the reason why the prime minister preferred to speak about the “5.4 percent.” Meanwhile, it’s been years since Russia’s economy grew at an annual rate in excess of five percent. To be exact, the last time this happened was 2008, when Russia’s annual GDP increased by 5.2 percent compared to the prior year. In 2021, Russia’s economy showed a 4.7-percent growth, but that was post-pandemic rebound growth after a 2.7-percent contraction in 2020.

Most Russian economists rely on quarterly GDP data when considering GDP dynamics. In mid-May, Rosstat published a report on the first quarter of the current year, showing a 1.9-percent annual GDP contraction, compared to the first quarter of 2022. When Rosstat amended its report in June, the result improved by a decimal point, to a negative 1.8 percent.

To better understand real-time dynamics, economists normally look at quarterly growth in relation to the preceding quarter, adjusting it for seasonal factors. Different experts use different adjustment methods, based on different mathematical models and assumptions. According to Russia’s Central Bank, for example, in the current year’s first quarter, Russia’s economy grew by 0.6 percent compared to the final quarter of 2022, after seasonal adjustment. Rosstat’s estimate for the same period is 0.7 percent, and independent experts give similar figures of 0.6–1 percent.

The quarterly pace of growth was roughly the same (0.5–0.7 percent) in the second half of 2022. Central Bank expected that April–June 2023 would see a similar rate of growth. And so, when Mishustin named a 0.6-percent growth rate in the first quarter, this was a fairly realistic figure, but had he tried to use the Economic Ministry’s monthly data for April, he would have had to tell the president that the GDP had not grown but contracted by 0.6 percent over the first quarter of 2023.

After briefing the president on real-time dynamics, Mishustin moved on to the forecast: “Forecasting might be thankless work,” he said, “but as I prepared for this meeting with the president, I thought about the numbers I could mention. At the moment, we’re confident — short of some force majeure, of course — that we should grow by more than two percent by the end of the year.”

Given a decade-long pattern of stagnation, two-percent annual growth was considered a good result for Russia’s economy before the war. Its average annual growth in 2009–2019 was just one percent, and only 0.8 percent over the five-year period of 2014–2019. When starting a new term in 2018, Putin set the goal of aligning the tempo of Russia’s economic growth with the global rate. But this objective is becoming more and more elusive over time: International Monetary Fund estimates that global GDP may grow by 2.9 percent this year. This brings us back to Putin’s conversation with the prime minister.

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While listening to Mishustin, Putin reminded him that the IMF had projected a mere 0.7-percent growth for Russia’s economy in 2023. Although Mishustin assured him that the Russian economists are far more optimistic, Putin’s skepticism was closer to the truth. In late spring this year, the Central Bank’s monthly survey of leading economists resulted in a consensus expectation that in 2023 Russia’s economy would only grow by 0.8 percent. In a recent update to this forecast, the Central Bank predicted a 0.5–2 percent expansion, leaving itself plenty of room for error.

To arrive at two-percent annual growth given a 0.6-percent growth in the first two quarters, that rate of growth would need to double in the second half of the year. This acceleration is unlikely: a Bloomberg Economics analyst Alexander Isakov notes, on his Telegram channel, that current growth represents a recovery, which is likelier to fizzle out than to accelerate. This is why the annual result is likelier to be close to 0.8–1 percent.

International economists often question Rosstat as a source of reliable data, suspecting that Russia’s economy has long stopped growing, despite the agency’s reports to the contrary. Russia’s economists, too, have been complaining about the quality of Rosstat data, but continue to use it in their projections all the same. Isakov, for example, has tried to verify the official 2022 GDP data using the PMI index calculated by S&P Global. The result was close to the 2.1 percent reported by Rosstat.

Apart from the sheer pace of growth, its quality matters as well. The main driver of Russia’s economic growth in 2023 are the federal budget’s military expenditures, as pointed out by Alexandra Prokopenko, an analyst at the Carnegie Endowment. In the first quarter of 2023, Russia’s defense sector has itself grown by a quarter. This expansion includes (according to Rosstat data) a 29-percent increase in electrical equipment production, a 27-percent increase in automotive production, and a 23-percent increase in the manufacture of computer hardware, optics, and electronic goods. Prokopenko’s reasonable conclusion is that “as soon as the budget stops spending on defense, economic growth will also stop.”

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Reportage by Margarita Liutova. Translated by Anna Razumnaya.

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