Russian Federation

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Another year of recession

The Russian economy is expected to remain in recession in 2023 despite the milder- than-expected contraction in 2022. The effects of Western sanctions were mitigated by successful financial stabilisation measures. These included the central bank’s move to hike interest rates from 9.5% to 20.0% shortly after the invasion of Ukraine only to gradually lower them to 7.50% in September 2022. Protecting the Russian financial system also included holding onto its large foreign currency reserves. These reserves, which are supervised by the Russian central bank, amounted to an equivalent of USD 589 billion in February 2023, of which nearly a half is frozen due to sanctions. However, USD 300 billion is left for potential intervention in the currency and debt markets. Despite Russian banks’ blocked access to the SWIFT financial transfer system, they still seem able to operate using other channels, enabling Russian banks to interact with the outside world. Moreover, after sharp fluctuations, the ruble stabilised and was, midway through February 2023, stronger by 3.5% compared to its average January 2022 level. This feat is attributed not only to promptly implemented capital controls but also to falling trading volumes and dynamics in the current account. Soaring oil and gas prices as well as the diversion of energy exports to non-sanctioned countries helped to record energy export revenues despite the voluntary reduction in gas exports and the oil embargo introduced by EU countries. As a result, the sanctions did not deeply hurt the Russian economy during this first stage. However, the magnitude of their impact has been gradually increasing and will pinch harder in the medium term. Overall, Russia's dependence on imports is not large, but some sectors are highly exposed, especially the manufacturing of transportation equipment, chemicals, food products, and the delivery of IT services. Restricted access to Western inputs due to sanctions has taken a toll on them despite attempts to find substitutes in other countries including China, Belarus and Turkey, as well as in permitting parallel imports, i.e., imports of various products without the approval of the brand owner. Sectors that have suffered sanctions, however, have experienced deep declines. In particular, the automotive output, which is affected by foreign companies exiting Russia, has collapsed. Import restrictions, the closure of Western airspace to Russian carriers and their cut-off from Western spare parts and services (including leasing) has resulted in a decline in airfreight. Thanks to government programmes to support domestic tourism and subsidies, passenger transport has declined to a much lesser extent.

Although the unemployment rate remains low in Russia (3.7% in December 2022), it is distorted by hidden unemployment due to relatively frequent downtime, unpaid leave or partial employment. Moreover, the labour force has decreased due to the mobilisation of workers in September 2022 and the accelerated emigration that ensued, which included the mostly high-educated workforce. Along with decreasing real wages (-1.0% in 2022 and around -10% compared to 2013), retail sales fell by 6.7% in 2022, with a double-digit drop in December 2022, while private consumption has been the traditional growth driver (its share of GDP dropped from 49% in 2021 to 47% of GDP in 2022). Moreover, the net outflow of capital from Russia soared from USD 74 billion in 2021 to USD 251 billion, a trend fuelled by Russians transferring their savings abroad. Deposits by Russian residents in foreign banks doubled and reached USD 82 billion. In 2023, the Russian economy will face even bigger headwinds. Consumer spending will be affected by uncertainty over the war, forcing production to adapt. Oil revenues are expected to fall due to lower prices and export volumes. The trend has already started after the EU imposed an embargo and a price cap, especially now that the price differential between Brent and Urals has widened significantly. Lower proceeds from oil and gas exports are expected to trigger currency depreciation, which will lead to inflationary pressure. Uncertainty will also hinder further investment growth, especially in companies.

Russia’s budget deficit soars amid slump in energy revenues

Massive spending and slumping energy revenues will widen the budget deficit in 2023. Admittedly, the government’s aim is to limit the federal budget deficit this year to officially 2% of GDP, while its increase could be financed by the National Wealth Fund and large state-owned banks, as well as by direct financing from the central bank. The 2022 budget balance was supported by proceeds from Gazprom amid falling revenues from the oil and gas sector, by almost 3 billion rubels from the National Wealth Fund, as well as from bonds (2.3 billion rubles) purchased by State-owned banks. In January 2023, Russia had already recorded a budget deficit of almost USD 25 billion (about 60% of the level planned for the whole year). The larger-than-planned 2023 deficit is likely to be partially financed by a mix of higher foreign currency sales, lower spending, more domestic borrowing and tax increases. The planned budget assumes an average Urals oil price of USD 70 per barrel after it traded at around USD 50 when a USD 60 price cap was imposed as an EU sanction in December 2022, compounded by a further cap on oil products in February 2023. As a result, Russia has already started to sell foreign currencies to cover its deficit and has looked at introducing a one-off, voluntary windfall tax on big business. War and sanctions have taken their toll on the proceeds from import duties and value-added tax on imported retail goods. Revenues from production taxes and export duties on the oil and gas sector, which together usually account for about a fifth of consolidated budget revenues and about 40% of federal budget revenues, have already decreased. In January 2023, these revenues had fallen by 45% year-over-year, leading to a total 35% drop in budget proceeds, which again meant tapping funds from the National Wealth Fund. Moreover, Russia planned to issue local bonds of 800 billion rubles in the first quarter of 2023. Increased defence spending has caused a surge in expenditures, which rose by 25% in 2022 and 59% year-over-year in January 2023.

In 2023, the current account surplus will not continue to turn in such a solid performance as that recorded in 2022 when it soared to USD 227.5 billion, i.e., its highest value in the second quarter, after which it started to decrease. High commodity prices and continued commodity deliveries abroad, especially in the first half of last year, have allowed Russia to increase revenues, while imports have been reduced due to sanctions. Deliveries have gradually decreased since the middle of 2022, when sanctions on Russian exports (metals, timber, coal, oil, gas) entered into force. At the same time, exports to non-Western countries, mainly China, India and Turkey, have accelerated.

War-related economic woes could lead to social discontent

A nationwide vote ratified constitutional reforms in July 2020, which included an amendment allowing President Putin to run for President for a further term in 2024 and remain in power until 2036. They also included lifetime immunity from prosecution for Presidents. The Parliamentary election in September 2021 preserved the constitutional majority of the ruling United Russia party (49.8% of the votes, with 324 seats out of 450).

However, social discontent could increase in 2023 as the Russian economy is expected to record another year of recession, eventually followed by years of stagnation due to hampered access to new technology, eroding purchasing power, and the country’s isolation, added to the lack of structural reforms. Already in 2023, hundreds of thousands of citizens (mostly young and male) fled the country after partial mobilisation was announced, which prompted a mass exodus of Russians across the border to neighbouring countries such as Georgia, Finland, Kazakhstan and Mongolia, to avoid conscription. Concerns over a further mobilisation drive could lead to further discontent and emigration.

That said, Putin’s approval rating jumped after the invasion of Ukraine. According to the Levada Center, an independent institution, approval reached 83% in January 2023 compared to 65% in December 2021, with a slight drop to 77% in September 2022 when partial mobilisation was announced. Survey results may however be affected by respondents’ fear of answering honestly. Similarly, the consumer sentiment index increased to 84% in December 2022 from 75% at the end of 2021.

Last updated: April 2023

Payment

Bank transfers in Russia are among the most popular instruments used for non-cash payments, for both international and domestic transactions. This is because they are fast, secure, and supported by a developed banking network. Despite this, cash is still one of the most widespread payment instruments used by individuals.

Debt collection

Amicable phase

The amicable phase begins with the creditor contacting the debtor, either via written correspondence or phone calls. If an agreement is reached, a payment plan can be offered to the debtor. Charging interest is legally allowed but hard to enforce unless an agreement to pay said interest currently exists between the debtor and the creditor. Any such agreement must be additional to any standing agreement between the parties.

Legal proceedings

The Russian judicial system is comprised of three branches: the regular court system, the arbitration court system (headed by the Supreme Court), and the Constitutional Court (a single body with no courts under it; in Russian constitutional law this function is known as “constitutional control” or “constitutional supervision”, and deals with a certain number of disputes where it has original jurisdiction).

The regular courts have a four-tier hierarchy and are responsible for civil and criminal cases: the Supreme Court of Russia, regional courts, district courts, and magistrate courts.

Arbitration courts review cases dealing with a wide matter of contractual issues, such as rights of ownership, contract changes, performance of obligations, loans, bank accounts and bankruptcy.

The highest court of appeal is the Supreme Court of the Russian Federation.

Fast-track proceedings

Russian law provides for simplified proceedings for certain types of cases, in which the creditor seeks to recover no more than RUB 500,000 from a legal entity or RUB 250,000 from an individual entrepreneur. Under Russian law, judges are to consider cases through simplified proceedings within a maximum of two months form the day when the Arbitrazh (arbitrage) court receives the statement of claim or application. Once the deadline for submissions of evidence has passed, cases are reviewed on their merits by judges, without the parties being called to appear.

Ordinary proceedings

Proceedings are initiated when a creditor files a statement of claim with the competent Arbitrazh court. The court must decide within five working days whether to accept the statement, and subsequently schedule a preliminary hearing. Debtors are usually notified of claims when they are served with a copy of the statement of claim, which includes the data of the initial hearing. There is no specific time frame during which defendants must submit their defense, but it must generally be done before the hearing on the merits). The court can set a deadline for submitting a statement of defense – if this is not submitted, the court will consider the case on the basis of the available materials. The preliminary preparation period ensures that the case can be resolved on its own merits during one court hearing. Cases must generally be resolved on their merits within three months after the respective statement of claim is received by the court. More complex commercial disputes can take considerably longer. The courts will normally award remedies in the form of compensatory damages or injunctions but punitive damages are not available.

Enforcement of a Legal Decision

A judgment is enforceable for three years provided that is has become final. If the debtor fails to satisfy the judgment, the creditor can request compulsory enforcement of the judgment from the court’s bailiff services. Foreign judgments must be recognized as a domestic decision by the Arbitrazh Court

through the Russian exequatur procedure. Although Russia has signed a small number of reciprocal recognition and enforcement agreements with foreign countries, domestic courts are reluctant to recognize foreign jurisdiction clauses.

Insolvency Proceedings

Supervision

Commercial Courts initiate the supervision process to evaluate the debtor’s financial situation and to secure the debtor’s property. After examining a filed insolvency claim, the court initiates the supervision process. The debtor can autonomously request a court to initiate supervision if settling some creditors’ claims would make it impossible for the debtor to fulfil other obligations, if execution on the debtor’s property means the debtor’s business has to cease, or if the debtor’s business is insolvent. A receiver is appointed, known as a temporary manager, who must approve certain transactions during the supervision, such buying or selling more than five percent of the accounting value of the debtor’s property.

Financial rehabilitation

The aim is to carry out any necessary measures to restore debtors’ solvency and settle their debts. The court and the creditors control the process. The application must include a rehabilitation plan that ensures the debtor’s obligations will be met. The court appoints a receiver to be the administrative manager, who supervises and controls the debtor’s affairs during the period of the financial rehabilitation. The administrative manager examines the debt repayment schedule and monitors any financial restructuring plans.

At least one month before the period of financial rehabilitation expires, the debtor must provide the administrative manager with a report on the results of the financial rehabilitation. Once the report has been examined, the manager must prepare an opinion on the extent to which debts have been paid and the financial restructuring plan has been achieved. The opinion is submitted to the court, which examines the results and either ends the proceedings, orders external administrator to manage the company, or declares the debtor bankrupt.

External administration

The objective is to restore the debtor’s solvency by applying special measures under an external administration plan, and to replace the debtor’s chief executive officer (CEO) with an independent external manager. Once the procedure begins, the court appoints a receiver known as the external manager, who must draft an external administration plan setting out the measures necessary to restore the debtor’s solvency within the period of the external administration procedure. At the end of the period, the manager prepares and submits a report to the creditor’s meeting, together with a proposal of one of the following four options:

• end judicial proceedings, if all creditors have been settled;
• extend the period;
• end external administrator, as the debtor is now solvent;
• enter administration and file for bankruptcy.

Amicable arrangement

Debtors and creditors may make an amicable arrangement to adjust debtors’ liabilities on negotiated terms during any rescue procedures. Generally, an amicable arrangement ends the powers of court-appointed receivers. If a debtor fails to comply with terms of an amicable arrangement, creditors are entitled to ask for a bailiff to execute the agreement.

Insolvency

The purpose of insolvency is to sell the debtor’s property and use the proceeds to pay creditors’ claim in proportionate amounts. The court may initiate the process during supervision, financial rehabilitation, or external administration. It appoints a receiver (insolvency manager) to replace the debtor’s CEO. The court and the creditors control the activity of the insolvency manager, who must provide progress reports. At the end of the proceedings, the court reviews the list of satisfied and unsatisfied claims. If they are fully satisfied, the court rules the proceedings complete and the debtor is liquidated. If they are not satisfied, proceedings are terminated, the debtor company is dissolved, and unsatisfied creditor’s claims are to be written off.