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The Russian economy clearly began to emerge from the corona crisis in March as industrial production went into the dark for the first time in nearly a year, posting a 1.1% expansion, and inflation fell. peaked and started declining again the same month.

The Russian economy contracted less than expected in 2020 and is now rebounding more strongly than expected in the first quarter. But it’s still early days, as while the economy grew a modest 0.5% in March, contractions of more than 2% in January and February mean the first quarter results remain negative.

Other indicators were also positive. The PMI Services index was above 55, signaling that services, which had been particularly affected by the lockdowns, are rebounding. Auto sales are down, but auto loans are up and residential construction is on the rise, helped by a generous state-backed mortgage subsidy.

The biggest macroeconomic indicators also performed well. The current account balance has decreased, but this is a good thing as it is due to the rapid increase in imports, as the Russians are starting to shop and feel confident enough about the future to buy. more expensive (and often imported) items, drawing on the large pool of savings they accumulated during the crisis year.

Likewise, the federal budget returned to profit in March after recording a deficit in 2020 for the first time in years. This was helped by a recovery in oil prices, which reached the mid-1960s at the end of April thanks to the recovery in global demand.

The scarecrow of this otherwise optimistic story is that inflation started to rise in the fourth quarter of 2020 and really took off at the start of this year, as companies anticipated the pandemic would end after vaccines appeared and commodity prices started to rise sharply. In addition to the recovery in oil prices, iron prices are at nine-year highs and copper prices topped $ 10,000 per tonne for the first time in late April.

Inflation is also fueled by rising food prices and the pass-through of the ruble devaluation in 2020. The government has intervened with administrative food price controls and a voluntary commitment by producers to refrain from passing on price increases on consumers. However, these measures, although politically attractive, are ineffective and cause distortions. The ruble has been very volatile and the sheer uncertainty has also fueled inflation.

The Central Bank of Russia (CBR) entered the breach and aggressively hiked rates in March (25bp) and April (50bp) in an attempt to nip the problem in the bud. Previously, the CBR had planned to increase rates by around 75bp in 2021, but has already added that amount and now plans to add a total of 125bp this year, ending six years of easing. , which will weigh on growth.

Inflation being driven by food and the effects of devaluation – none of these things are a monetary problem – increases in the CBR will therefore reduce inflation only marginally and its main tool is ineffective. The central bank cannot do more than simply wait for the economy to find a new equilibrium, but it should take around six months at most, and the psychological impact of decisive action will help the process.

At the same time, real incomes fell 3.6% in the first quarter and this is a bigger problem both economically and politically. The situation is confused here, as the weak base effects and distortions of last year’s crisis are already being felt. For example, retail turnover in March was down 3.4% year on year, but this is measured against March 2020, when retail sales increased 6.1% year-on-year. annual as people began stockpiling goods ahead of the much-anticipated lockdown that was imposed in April. Looking at the month-to-month results, the situation does not look as dire as the numbers suggest. This is a problem that will only get worse in the months to come.

The good news is that all of these problems are seen as temporary and as the result of rebalancing the economy as it recovers from the multiple shocks it suffered over the past year. Inflation is expected to come down as the seasonal effect on food prices begins to show during the summer dacha season (last year’s potato production increased as the Russians shifted removed to their dachas during the lockdown) and the pass-through devaluation effect typically takes around six months. its course and will also fade over the next few months.

Analysts see the ruble strengthening from here in all scenarios. How much stronger it gets depends a lot on geopolitical tensions and oil prices, the two big concerns for the future. With the OPEC + agreement still in place and a global economic rebound already underway, the outlook for oil looks good; Geopolitics, not so much, however.

In April, tensions erupted again as Russia moved some 40,000 troops to the Ukrainian border for “exercises”. The Kremlin said it was only reacting to Ukraine’s decision to move troops to the contact line in the Donbass over the previous two months as part of the spring rotation for the new season of campaign, and there are reports that Ukrainian troops were on the move, also bringing in heavier artillery. Some have speculated that this was a decision by Ukrainian President Volodymyr Zelenskiy to elicit exactly the response he received from Russia in order to pressure the West for more help. It’s still unclear exactly what just happened, but whatever the truth, Russia’s response was overblown and clearly designed to send a message to the White House that the Kremlin can, and will, create serious problems. if more penalties are imposed.

As bne IntelliNews The geopolitical situation is very fluid at the moment, as the United States and Russia have tried to set the tone for relations for the next four years under the Biden administration, has been abundantly reported. The United States imposed new largely symbolic sanctions on April 15, but for the first time targeted Russian domestic debt. This will threaten an outright ban on foreign ownership of OFZ ruble-denominated treasury bills – the so-called “nuclear option”. However, in the remarks following the sanctions, Biden went out of his way to point out that the United States “could have done more, but did not do it” and that he was interested in a “stable” relationship. with Russia. With the stick of sanctions, he offered the carrot of a summit to start talking about arms control and other global issues like the climate crisis. Diplomacy is really back.

Russian President Vladimir Putin set a similar tone in his State of the Nation address on April 21, which mixed up threats of retaliation if the red lines were crossed, but also made an offer for talks on the same issues. .

The mere fact that international relations are becoming traditional again is a very positive sign. As bne IntelliNews argued, all of these measures are ambitious, but there is real common ground between Moscow and Washington and the two presidents must focus on repairing their own economies. Tensions are a costly distraction. The same goes for the EU with both hands, which is obviously very tired of the “Russia problem” and is looking for a new pragmatic, if not friendly, relationship. It should be noted that at the end of the same day, the Kremlin withdrew its troops from the Ukrainian border. Putin was sitting in a video conference, face to face with Biden, and urging Russia to do more in the campaign on the climate crisis.

The Kremlin appears to have accepted the April 15 sanctions as measured – given Trump’s legacy of being “gentle” to Russia and the domestic political configuration of the United States, it was inconceivable that no sanctions would be imposed – because they didn’t do any damage ”at all. The proposed summit between Biden and Putin is still ongoing, tentatively scheduled for June 15-16. If progress is made, tensions will ease further, the ruble will rise to around RUB 69, according to Renaissance Capital, and as the cost of borrowing drops, investments will rise, fueling the economic rebound already underway.

The Kremlin is also setting the stage for the key Duma elections in September, and since anti-corruption activist and opposition politician Alexei Navalny returned to Russia, the Kremlin has decided it has already suffered so much damage in PR matter that there was nothing to lose by crushing Navalny. and its organization completely. As April draws to a close, courts in Moscow are set to label the Navalny Anti-Corruption Foundation (FBK) as an “extremist” organization like terrorist groups, and the team Navalny decided to shut down all operations to protect workers who would otherwise face long prison terms.

The Baltic Sea-based media project Meduza.io has also been called a “foreign agent” and must now warn readers in double print on all of its pages that he is working for a foreign government that it says will kill him. like a release. Meduza has actively reported government abuses, human rights and corruption.

It is outright repression. Russia’s non-systemic opposition is fragmentary and ineffective. Navalny does not enjoy much support as a politician but he is widely respected as an anti-corruption activist and his documentary “Poutine’s Palace” has over 100 million views. Navalny has sparked a national conversation about what kind of country and government regular Russians want, effectively holding the government to account. Losing Navalny’s voice is a step backwards for Russia, because it is a conversation that is absolutely necessary.