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It’s difficult to get a read on the current Russian economy. While the government boasts that its economy is doing well and is overcoming powerful sanctions, Russians on the streets are transferring large amounts of money overseas and converting their assets to cash, indicating that the majority of the population has little faith in the positive economic image that Moscow is pushing and are doubtful of their country’s economic future.
The government’s optimism begins with the St. Petersburg International Economic Forum (SPIEF), which was held last week with the opening session including Elvira Nabiullina who is the head of Central Bank, Finance Minister Anton Siluanov, Economy Minister Maxim Reshetnikov, and Maxi Oreshkin who is an aide to President Putin, according to The Bell.
Oreshkin said that half the individuals who fled Russia in 2022 after the announcement of the partial mobilization, have returned to the country according to banking statistics. Siluanov cracked jokes that pessimists were the ones who left Russia and that it was the economist’s job to bring them back, however, estimates show that at least 500,000 Russians who fled have still not returned.
Meanwhile, Reshetnikov downplayed Russia’s true economic state claiming that “everything turned out better than expected” regarding where the Russian economy ended up in 2022 compared to where the Kremlin thought it was headed. Reshnenikov stated that the economy was ready to enter a growth phase “based on our domestic market and our own supply and demand.” Nabiullina, however, argued that Russia still needs to remain friendly with its allies saying, “we need to integrate with other countries, with investors who are ready to integrate, and to enter export markets.”
Reshetnikov and Siluanov both argued, however, that investment was needed to push the economy forward.
“We have money in the economy. Pretax profits of non-finance companies, excluding small businesses, are at 23% GDP, and 10% of investment,” Siluanov said.
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The actual picture of Russia’s economy is a bit different, however. Russian citizens are going against the cycle being promoted by the government and the Kremlin’s hopes. Russians are “dollarizing” at an alarming rate while Russia’s cross-border trade is “de-dollarizing.”
While the percentage of “unfriendly currencies” in Russia’s net exports has fallen drastically since the beginning of the war in Ukraine, Russians’ trust in the Ruble appears to be dwindling. An October poll by state pollsters VTsIOM found that 64% of Russians wanted to hold their savings in rubles, 10% in Chinese yuan, 8% in dollars, and 3% in euros.
While 64% looks promising for the ruble, it’s not when compared with pre-war and pre-pandemic figures. In 2019-2020, prior to the war only 8-14% of Russians wanted to hold their savings in dollars. Prior to the pandemic, only 1% of the population was interested in “alternative currencies” but now 1 in 10 Russians is willing to hold saving in yuan instead of the ruble.
The sharp turn is also in the face of substantial restrictions on depositing foreign currencies in Russian banks, with many banks forcing citizens to withdraw some of their foreign currency holdings. While 3.1 trillion rubles’ worth of foreign currently was withdrawn by citizens in 2022 and the first quarter of 2023 according to the central bank, over the same timeframe, 2.6 trillion rubles’ worth of foreign currency was transferred to foreign bank accounts and an additional 1.9 trillion was kept as “cash in hand.” In short, the forced withdrawal of Russians’ foreign currency from banks is not translating into currency converted to rubles, but rather its money being taken out and either held onto as foreign currency or transferred overseas to banks abroad. Since the beginning of the war, the amount of Russians’ savings in foreign banks has more than doubled to 5.4 trillion rubles ($67.3 billion) as of April 2023, according to The Bell.
As for where the money is going, statistics show that it is young individuals with higher education who live in large cities and have savings that are most likely to keep foreign accounts overseas. They are also the same portion of the population who were most likely to have left Russia in 2022.
Private investors have also essentially been forced to transfer their funds overseas as well. While Russians could previously purchase foreign securities through Russian brokers, that is no longer permitted. Investor transfers to foreign brokers have increased 16-fold since 2021. A total of 50 billion rubles have been transferred to foreign brokers in the first quarter of 2023 alone.
The shift appears to indicate that Russians are not only losing faith in the ruble but are also not buying into the government’s optimistic economic claims.
Also of concern for the economy is the record-high amount of cash circulating in Russia. In April, the country hit an all-time record of 17.15 trillion rubles circulating. According to Deputy Governor of the central bank Alexei Zabotkin, the trend was a quirk of the economics in occupied Ukrainian territory where he said “the [Ukrainian] hryvnia is no longer in use.”
Zabotkin’s theory doesn’t explain the high demand for cash outside of the four regions of Ukraine that Russia now refers to as “new territories.” The abundance of cash instead indicates the “gray economy” is expanding, which suggests that Russians are growing more concerned about maintaining access to their accounts. As the State Duma continues to pass a myriad of wartime laws, it increases anxiety among Russian citizens.
The reality of the Russian economy is one of uncertainty, anxiety, and dwindling trust not only in the country’s economy but also in its government as its citizens continue to liquidate assets, transfer investments and funds abroad, and hold onto cash. Unfortunately, it’s a reality that Russian officials don’t seem to want to face.
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