Russia’s economy has weathered the West’s sanctions – but how?

Published

2 years ago

February 24, 2023

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In the aftermath of Russia’s invasion of Ukraine, Western leaders heralded a sanctions regime that would cripple the country’s war machine.

Joe Biden claimed Russia’s economy would be “cut in half”, while Boris Johnson spoke of squeezing it “piece by piece.”

A year has passed, but that great promise has been slow to deliver.

“The Russian economy and system of government have turned out to be much stronger than the West believed,” President Vladimir Putin said in a speech to the country’s parliament on Tuesday.

He was also flexing his muscles at an economic cabinet meeting last month: “Remember, some of our experts here in the country – I’m not even talking about Western experts – thought [gross domestic product] would fall by 10%, 15%, even 20%.”

Instead, Russia shrunk by a relatively modest 2.2% and it is expected to grow by 0.3% this year, according to the International Monetary Fund.

It means the sanctions-hit country will outperform Britain.

Among Western leaders, these predictions will make for unpleasant reading.

Over the past year, sanctions have descended on Russia’s economy but, to the surprise of most economists, it has weathered the storm.

This is largely down to the country’s oil and gas reserves. Although Europe turned its back on Russian energy exports, the country was able to exploit delays in imposing the ban, which helped bolster its public finances.

Revenues held up strongly thanks to a global spike in energy prices and a successful reorientation of trade to China and India.

Russia was already sitting on a comfortable cushion.

Record high trade surpluses following the invasion came after years of conservative fiscal policies which allowed the country to amass a fund that it is now deploying in the war against Ukraine.

The country has been quietly sanctions proofing its economy for years.

Russians are enjoying record low unemployment and wage growth that has helped them to weather the worst of rising inflation.

They’re still cautious about spending during times of economic uncertainty, but the government is trying its best to encourage them by hiking minimum wages and pensions.

While economic data is not wholly reliable, nor does it provide a full view of the strains Russian society is under, the domestic economy has not collapsed in the way some had warned.

President Putin is in a triumphant mood but it may not last for long as cracks are starting to show.

Oil revenues are slipping now that Western countries have introduced a price cap on Russian Urals, its main crude export blend, and the country’s public finances are deteriorating as a result.

At the same time Russia is having to ramp up military spending and is relying on sales of foreign currency – Chinese yuan – to support the rouble. Last year may have exceeded expectations, but the sting of Western sanctions is only just starting to be felt.

Jobs

Living standards in Russia have been supported by record high wage growth and low unemployment.

When the war first broke out, analysts expected the departure of foreign companies to lead to mass job losses.

Instead, unemployment fell to a record low of 3.7% as Western firms handed over their businesses to local partners, which helped to maintain employment.

However, the headline unemployment rate is disguising a massive drop in the size of the workforce.

Hundreds and thousands of skilled workers have left or fled the country, either to fight or find work elsewhere – estimates range from 0.4% to 1.4% of Russia’s workforce. This is weighing on economic growth, with the country’s central bank warning recently: “The capacity to expand production in the Russian economy is largely limited by the labour market conditions.”

As in Britain, where a shrinking labour market is affecting the country’s economic outlook and putting pressure on inflation, Russia’s fortunes will also depend on how well the size of its workforce recovers.

Tatiana Orlova, economist at Oxford Economics, said: “There is anecdotal evidence that some of those who left in panic in March or September have since returned, due perhaps to their being unable to find an equivalent job abroad or because they still had family and property back in Russia.”

Wages

The tight labour market has led to robust wage growth – especially for IT professionals, construction workers and hospitality staff – which is boosting living standards. Wage growth in Russia is almost keeping pace with inflation and the government is hiking pensions and the national minimum wage, which will go up by another 10% next January after rising by 20% last year.

Consumer spending

Oil revenues get a lot of attention but consumer spending is still the dominant part of the country’s economy and the government is hoping that the extra money will encourage Russians to go out and spend, something they have been cautious about indulging in over the past year.

It may have a large task on its hands, however. Many analysts expect Russia to launch a new offensive in the coming weeks in an effort to capture the whole of Donbas. If the country’s leadership announce a new wave of mobilisation then consumer confidence will likely drop again, causing households to prioritise saving over spending.

“The savings-to-disposable income ratio will rise again and stay elevated until the fighting abates, hampering authorities’ efforts to revive household demand,” Ms Orlova said.

Business investment

Another round of mobilisation could also start weighing on business confidence. In the early days of the conflict economists were convinced that business investment would collapse at its fastest pace in decades but that did not happen.

Bumper profits for oil, gas and fertiliser producers helped fund business plans, with fixed investment increasing by 6% in 2021.

As Russia diverted its energy exports to Asia, the country required a massive increase in infrastructure.

This also helped boost the country’s manufacturing sector, although not uniformly. The country’s car industry, for example, collapsed last year as manufacturers struggled to access key component parts and tools from the west. Others are coping by accessing parts from Turkey, which is yet to participate in the international sanctions.

Oil and gas

Attempts to strangle Russia’s economy were immediately stifled by Europe’s heavy reliance on Russian oil and gas exports, which make up about 40% of the country’s revenues.

Russia successfully exploited this.

In the nine months that it took for the EU to agree and implement a bloc-wide ban on Russian oil exports, Putin’s regime enjoyed record fiscal surpluses as the country benefited from soaring wholesale prices, with its current account surplus jumping by 86% to $227.4bn.

This gave Russia a giant cushion to help fund the war effort and strengthened its currency, helping keep the price of imports low and dampening inflation.

During this time the country was also able to redirect supply to India and China, where its overall crude and fuel oil exports reached a record high of 1.66 million barrels a day last month.

A more challenging 2023

This year will be more challenging.

The country’s public finances are already starting to weaken as lower energy prices weigh on revenues. A $60 a barrel price cap on Russian crude oil – imposed by the EU, G7 and Australia in December – means the country is being forced to sell oil at a considerably discounted price compared to the global Brent benchmark.

The cap was recently extended to refined petroleum products as well.

Russia’s budget deficit came in at £20.8bn in January as income from oil and gas fell by 46% over the year. At the same time, government spending increased by 59% over the year.

Economists identified these as early signs of strain, with the country having to sell more Chinese currency and issue local debt to support itself.

However, they were still relatively sanguine about the country’s prospects.

Sofya Donets, chief Russia economist at Renaissance Capital, said: “The fiscal deficit expanded in 2022 but remained still moderate at 2% – below the pandemic or the great financial crisis levels.”

She added: “With the public debt below 20% of GDP the financing is hardly an immediate source of the stress, though a sustainable decrease in oil and gas revenues will call for a medium-term fiscal consolidation and non-oil tax increase, we believe.

“This consolidation, however, is yet not that urgent and could be delayed by up to two years, we assume.”

Analysts said the country had scope to increase the tax intake by levelling windfall tax on energy and fertiliser producers.

Crucially, Russia is able to meet its financing needs comfortably at home.

Both the government and corporations have very low levels of external debt and the government has built up a robust sovereign wealth fund.

“We need to remember Russia has spent the best part of 10 years sanctions proofing its economy,” said Liam Peach of Capital Economics.

“What all this meant was being cut out of global capital markets and sanctions on various corporates, banks and the government didn’t really have much of an impact on their financial needs, because they were quite low. So Russia’s government, for example, could go eight months without issuing any debt.”

Business

Manchester United Foundation to be targeted in Ratcliffe costs purge

Published

11 mins ago

December 29, 2024

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Manchester United Foundation to be targeted in Ratcliffe costs purge

Manchester United Football Club is to cut the funding it provides to its charitable arm as part of a purge of costs being overseen by Sir Jim Ratcliffe, its newest billionaire shareholder.

Sky News has learnt that the Premier League club plans to inform the Manchester United Foundation that it intends to curb the benefits it provides – which totalled close to £1m last year – from 2025 onwards.

Sources close to the situation said a substantial element of the support given to the Foundation by the club would be axed, although Old Trafford insiders insisted on Sunday that it would still provide “significant” support to the charitable wing.

A decision is said to have been made by the club’s leadership to proceed with the cuts, with the Foundation expected to be informed about the scale of the reductions in the coming weeks.

In 2023, the club paid the MU Foundation nearly £175,000 for charity services, which include managing the distribution of signed merchandise to individuals raising funds for charitable causes.

Manchester United also provided gifts in kind amounting to £665,000 last year, which were understood to include use of the Old Trafford pitch and other facilities, alongside free club merchandise and the use of back-office services such as the club’s IT capabilities.

The MU Foundation works in local communities around Manchester and Salford to engage with underprivileged and marginalised people.

Its projects include Street Reds, which is targeted at 8- to 18-year-olds, and Primary Reds, which works in school classrooms with 5- to 11-year-olds.

It also organises hospital visits to support children with life-threatening illnesses.

The disclosure about the latest target of cost-cutting by Sir Jim’s Ineos Sports group, which now owns close to a 29% stake of Manchester United, comes just a day after The Sun revealed that an association set up to facilitate relations between former players, would see its club funding axed.

A similar move has been made in relation to funding for the club’s disabled fans’ group, while hundreds of full-time staff have been made redundant in recent months and costs have been slashed across most areas of its operations.

People close to the club anticipate further cost-cutting measures being introduced as soon as next month.

One club source said it remained “proud of the work carried out by the Manchester United Foundation to increase opportunities for vulnerable young people across Greater Manchester”.

“All areas of club expenditure are being reviewed due to ongoing losses.

“However, significant support for the Foundation will continue.”

Sir Jim has injected $300m of his multibillion pound fortune into Manchester United, although it will need to raise substantially more than that to fund redevelopments to Old Trafford or a new stadium.

Last year, the club, which is listed on the New York Stock Exchange, lost more than £110m, with sizeable interest payments totalling tens of millions of pounds annually required to service its debt burden.

The men’s first team has seen an alarming run of results under Ruben Amorim, who was appointed to succeed Erik Ten Hag in the autumn.

United have lost three of their last four matches – the exception being a derby win away at Manchester City – and lie 14th in the Premier League table.

Mr Amorim has acknowledged that he could face the same fate as Mr Ten Hag unless results improve.

Dan Ashworth, who was brought in from Newcastle United FC as sporting director in the summer, left after just five months.

Responding to news of the plans, a spokesman for the Manchester United Supporters Trust (MUST) said: “The prospect of cuts to the charitable Foundation are another depressing example of the wrong priorities at United, cutting back on support to the community it purports to serve.

“Financial sustainability is important but instead of further investment to show ambition and go for growth, the Club is counter-productively trying to cut its way out of its problems.

“It’s hard not to conclude that the negative atmosphere they’re breeding is feeding its way through to the equally depressing performances on the field.”

Manchester United declined to comment formally on the proposed cuts to the funding of its charitable arm.

Business

Starmer throws down gauntlet to watchdogs with growth edict

Published

1 day ago

December 28, 2024

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Starmer throws down gauntlet to watchdogs with growth edict

Sir Keir Starmer has ordered Britain’s key watchdogs to remove barriers to growth in a bid to kickstart Britain’s sluggish economy.

Sky News has learnt that the prime minister wrote to more than ten regulators – including Ofgem, Ofwat, the Financial Conduct Authority and the Competition and Markets Authority – on Christmas Eve to demand they submit a range of pro-growth initiatives to Downing Street by the middle of January.

One recipient of the letter, which was also signed by Rachel Reeves, the chancellor, and Jonathan Reynolds, the business secretary, said it was unambiguous in its direction to regulators to prioritise growth and investment.

Ofcom, the Environment Agency and healthcare regulators are also all understood to have been sent it.

It comes after a torrid first few months in office for the PM, who has been forced onto the back foot by a series of damaging sleaze rows and turbulent policymaking.

October’s budget, which involved pledges to raise taxes by tens of billions of pounds, triggered a bruising backlash from the private sector, with bosses in a string of sectors warning that it will fuel inflation and cause job losses and business closures.

One regulatory source said this weekend that the letter to watchdogs and a wider drive for regulatory reform emanating from Downing Street were the brainchild of Varun Chandra, the PM’s special adviser on business and investment.

Sir Keir’s letter is understood to have referred to a need for every government department and regulator to support growth, and called on each recipient to submit five ideas for delivering that mandate by 16 January.

The letter also urged regulators to identify how the government could remove barriers to economic growth and where regulatory objectives were either conflicting or confused.

Mr Chandra is said by government insiders to have ruffled feathers in Whitehall since his appointment shortly after Labour’s massive general election victory in July.

A former managing partner at Hakluyt, the strategic advisory firm, Mr Chandra has been “relentlessly” emphasising the urgency of transforming business sentiment to drive growth, according to one Whitehall source.

The insider added that the letter to watchdogs was expected to be the first step in a broader programme of supply-side reforms to be overseen by Downing Street during the coming months.

Most of Britain’s economic regulators already have a Growth Duty enshrined in their statute, having come into effect in March 2017 under the Deregulation Act of two years earlier.

The push for watchdogs to have greater regard for economic competitiveness has already triggered a series of flashpoints, most notably in the financial services industry, where ministers have clashed with FCA officials over a number of policy areas.

Sir Keir has already signalled his aim of removing red tape, telling the government’s flagship International Investment Summit in the autumn: “The key test for me on regulation is of course growth.

“We’ve got to look at regulation across the piece, and where it is needlessly holding back the investment we need to take our country forward.

“Where it is stopping us building the homes, the data centres, the warehouses, grid connectors, roads, trainlines, then mark my words – we will get rid of it.”

On Saturday, a government spokesman declined to comment on the contents of the letter to regulators but said: “Our Plan for Change will drive economic growth right across the country, putting more money in people’s pockets.

“Regulating for growth instead of just risk is essential to that mission, ensuring that regulation does not unnecessarily hold back investment and good jobs in the UK.”

Business

Searchlight shines on £140m funding package for insurer Wefox

Published

2 days ago

December 27, 2024

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Searchlight shines on £140m funding package for insurer Wefox

Searchlight Capital Partners, the private equity firm which has backed companies including Secret Escapes, is to lead a new funding package for Wefox, the European insurance company, that could be worth up to €170m (£141m).

Sky News has learnt that Searchlight has effectively proposed stepping in to refinance Wefox’s existing bank debt as the group seeks to avoid a fire-sale of its most prized assets.

Banking sources said a deal was close to being struck with Searchlight, which would be accompanied by an equity raise of between €80m (£66.5m) and €100m (£83.1m).

Last month, Sky News revealed that existing shareholders in Wefox, which operates across a swathe of European markets, were preparing to back a fresh cash call.

This group is understood to be led by Chrysalis, the London-listed investor in companies such as Klarna and Starling Bank, and Target Global.

One banker said that if completed, the wider refinancing deal involving Searchlight could be announced as soon as next month.

The share sale has been designed to allow Wefox to avert a sale of TAF, one of its prized subsidiaries.

It said earlier this month that it had reached an agreement to sell its insurance carrier arm to a group of Swiss companies led by BERAG, an independent provider of pension services.

Wefox is also backed by prominent investors including the Abu Dhabi state fund Mubadala.

The company has twice this year warned that it faced running out of money within months.

It has been ravaged by losses in a number of its key markets including Italy, although its operations in the Netherlands remain profitable.

The company was valued at $4.5bn (£3.6bn) in a funding round less than two years ago and counts Barclays and JP Morgan among its lenders.

It is now valued at far less than the $1bn (£796m) needed to preserve its status as a tech unicorn.

Earlier this year, the company bought itself time by raising roughly €20m (£16.6m) from existing investors, while it has also sold Assona, a subsidiary which offers insurance cover for electric bikes.

Founded in 2015, Wefox sells insurance products through in-house and external insurance brokers, and has frequently boasted of its ambition of revolutionising the insurance industry through the use of technology.

It has more than 2 million customers across its business.

In July 2022, Wefox raised a $400m (£318m) Series D funding round valuing it at $4.5bn (£3.6bn), making it one of the largest fintechs in Europe.

That followed a $650m round in May 2021 valuing it at $3bn, reflecting the frothy appetite of investors to back scale-ups regarded as having the potential to become global competitors of genuine scale.

Neither Wefox nor Searchlight could be reached for comment.