Angle: Russia’s economy recovers with partial mobilization, hitting productivity and demand | Reuters

MOSCOW (Reuters) – Russia’s economy, already battered by Western sanctions, is now being hurt further by domestic factors. There are growing fears that Putin’s September 21 partial mobilization order will hit productivity and drag down demand and the economic recovery.

Russia’s economy, already hurt by Western sanctions, is now being hurt further by domestic factors. There are growing fears that Putin’s partial mobilization order will hit productivity and drag down demand and the economic recovery. FILE PHOTO: Omsk, Russia, January 2022. REUTERS/Alexey Malgavko

Hundreds of thousands of men have so far been drafted or fled the country. Russia’s economy, which has performed better than originally expected despite Western sanctions, is facing a thorny problem of uncertainty that paralyzes investment activity.

“Partial mobilization orders and heightened geopolitical and sanctions risks are about to set off a second wave of economic crises,” said Evgeny Suvorov, an economist at Centro Credit Bank, adding that the Russian economy will contract further towards the end of the year. expected.

Putin on Monday instructed the government to take steps to stimulate consumer demand after retail sales fell in the last week of September. He has denied any connection between the abrupt announcement of the partial mobilization order and the decline in consumption. Nevertheless, Russia’s central bank said on Monday that economic activity had slowed markedly at the end of September.

Households spent on non-food items fell 12.7% year-on-year in the week of Sept. 19-25, compared with the previous week, according to data compiled by Sberbank’s Sberindex. The decline expanded from the 9.2% decline. The week from Sept. 26 to Oct. 2 also saw a double-digit decline of 12.2%.

“Retail sales, especially in the big-ticket and non-grocery categories, are likely to return to double-digit declines in the coming months,” said Sophia Donets, an economist at Renaissance Capital. May was the last month for retail sales to fall by double digits month-on-month.

Russia’s Ministry of Economic Development announced in April that it expected gross domestic product (GDP) growth to drop by more than 12% this year. Since then, the government’s economic outlook has steadily improved, supported by higher oil prices and a growing current account surplus.

Analysts polled by Reuters in late September forecast Russia’s GDP growth to fall 3.2% this year, while the Ministry of Economic Development forecast 2.9%. The Ministry of Economic Development is much more optimistic next year, with a 0.8% drop, compared to analysts’ forecasts of -2.5%.

But as Russia ramps up its military operations in Ukraine, the economic recovery that has shown some momentum could falter.

“The main consequence of partial mobilization is the loss of human capital,” said veteran economist Natalia Zvarevich, adding that since you never know when you may see the light at the end of the tunnel, there is maximum fear and uncertainty. He explained that the situation was escalating rapidly.

In fact, the duration and ultimate scale of partial mobilization are still unclear. Meanwhile, Russian media say an estimated 700,000 people have fled the country since the announcement of the partial mobilization order.

Dmitry Polevoy, investment director at Rokuko Invest, estimates that between 0.4% and 1.4% of Russia’s working-age population has already fled or is a conscript ready to be sent to the battlefield. .

Mr. Polevoy analyzes that partial mobilization will hurt Russia’s demographics, labor market, and investment environment, as it is difficult for Russia to obtain advanced equipment and technology. . He lamented, “When human capital alone could be calculated as the driving force of the economy, part of the working-age population is being drafted and another part is fleeing.”

The mobilization process has been subject to systematic chaos, with some cabinet ministers rushing to initiate deferral procedures for their key subordinates. Meanwhile, SMEs are poised to become the biggest victims of partial mobilization.

“The worst would be small businesses,” Mr. Zvarevich said.

With prices untimely showing signs of rising again, a central bank rate cut cycle likely to end, and partial mobilization shocking the economy could create new headaches for policymakers. not strange.

(Reporters by Darya Korsunskaya and Alexander Marrow)