Russia's economy contracts 1.9% in first quarter amid lower oil income

Moscow, Russia – Russia's gross domestic product shrank by 1.9 per cent in the first quarter of 2023, the country's statistics agency Rosstat said Wednesday.

The economy was weighed down by another wave of sanctions imposed over its offensive in Ukraine, including a ban by the European Union on Russian petroleum products, on top of a price cap agreed with the Group of Seven and Australia.

According to Capital Economics, an independent Londonbased think tank, this contraction is "smaller-than-expected", which "suggests that the economy has turned a corner and that growth accelerated."

Government spending is boosting industry and retail sales, it added.

"We think that Russia's economy is on track to post positive GDP growth in 2023 as a whole," it said in a note published Wednesday.

Russia's economy contracted 2.1 per cent last year.

Sanctions nevertheless had a measurable impact on the Russian economy.

Despite oil export volumes at their highest level since the offensive began, oil revenues were still down 43 per cent compared to a year ago, the International Energy Agency (IEA) said in March.

Lower oil revenues directly impacted the budget deficit, which hit 3.4tn rubles

The finance ministry said the deficit was due to shrinking energy revenues (down 52 per cent) and increasing expenditures (up 26 per cent), partly due to the Ukraine offensive

(Us$42.3bn) between January and April.

This is considerably more than the target deficit of 2.9tn rubles.

The finance ministry said the deficit was due to shrinking energy revenues (-52 per cent) and increasing expenditures (+26 per cent), partly due to the Ukraine offensive.

On Wednesday, Rosstat said however the construction and agricultural sectors had held up well during the first quarter.

Experts said that given this trajectory Russia's public sector deficit could reach between three and four percent of the GDP, higher than the two percent target.

Inflation dropped in March to a 3.5 per cent annual rate, and to 2.3 per cent in April.

Russia's low unemployment rate of 3.5 per cent is not a healthy sign, but rather a symptom of its shrinking labour force.

Russia has for years dealt with a demographic crisis, which only worsened with the Ukraine offensive.

It left the economy contending with a shortage of workers, with various sectors struggling to fill posts.

Russian authorities now believe that growth will be driven by consumption rather than exports, including because of increasing real wages.