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18https://doi.org/10.21603/2782-2435-2024-4-1-27-46 ТЕОРИЯ И ПРАКТИКА
2024. Том 4. № 1
Original article
Strategic View: why Forecasters were Wrong on Russian Growth for 2022 and 2023, and why they probably will be for 2024
Jacques Sapir
Center for the Study of Industrialization Modes, Paris, France sapir@msh-paris.fr
Abstract: With the start of Western sanctions against Russia at the end of February 2022, numerous catastrophic forecasts have been made about the Russian economy by both Western and some Russian economic institutions. However, neither for 2022 nor for 2023 were these predictions vindicated. Multiple errors can be traced to both technical difficulties associated with making serious forecasts in a rapidly changing situation, the nature of model used, and ideological or political bias. Even some Russian institutions demonstrated forecasting errors. The massive economic growth that started in Russia in the second quarter of 2023 obviously surprises economists. One wonders if such a situation will repeat it 2024.
Keywords: economic growth, Russia, sanctions, forecasting, forecasting errors
Citation: Sapir J. Strategic View: why Forecasters were Wrong on Russian Growth for 2022 and 2023, and why they probably will be for 2024. Strategizing: Theory and Practice. 2024;4(1):27-46. https://doi. org/10.21603/2782-2435-2024-4-1-27-46
Received 05 January 2024. Reviewed 14 January 2024. Accepted 22 January 2024.
Оригинальная статья УДК 338.27(470+571)
Стратегический взгляд: почему прогнозы экономического роста России на 2022 и 2023 гг. провалились и почему они, по всей вероятности, провалятся и в 2024 г.
Ж. Сапир
Центр изучения режимов индустриализации, Париж, Франция sapir@msh-paris.fr
Аннотация: Когда в конце февраля 2022 г. на Россию обрушились санкции, западные и некоторые отечественные экономические институты стали прогнозировать различные катастрофы в отношении российской экономики. Однако ни в 2022 г., ни в 2023 г. эти прогнозы не оправдались. Причины ошибочного прогнозирования могут быть связаны как с техническими трудностями, связанными с невозможностью разработать надежный прогноз в условиях быстро меняющейся ситуации, так и с характером используемой модели, а также с идеологической или политической предвзятостью прогнозистов. Однако даже некоторые российские институты не были застрахованы от ошибок прогнозирования. В результате масштабный экономический рост, начавшийся в России во втором квартале 2023 г., стал для экономистов сюрпризом. Существует ли вероятность, что такая ситуация повторится в 2024 г.?
© 2024. Автор(ы). Статья распространяется на условиях лицензии CC BY 4.0
27
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Sapir J. Strategic View: why Forecasters... https://doi.org/1Q.21603/2782-2435-2Q24-4-1-27-46
Ключевые слова: экономический рост, Россия, санкции, прогнозирование, ошибки прогнозирования
Цитирование: Сапир Ж. Стратегический взгляд: почему прогнозы экономического роста России на 2022 и 2023 гг. провалились и почему они, по всей вероятности, провалятся и в 2024 г. // Стратегирование: теория и практика. 2024. Т 4. № 1. С. 27-46. (На англ.) https://doi.org/10.21603/2782-2435-2Q24-4-1-27-46
Поступила в редакцию 05.01.2024. Прошла рецензирование 14.01.2024. Принята к печати 22.01.2024.
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INTRODUCTION
Since the start of the Western sanctions against Russia at the end of February 2022, numerous catastrophic forecasts have been made about Russian economy. The effect of sanctions, or more accurately “measures of economic coercion” taken against Russia since the beginning of the conflict in Ukraine, has been the topic of much discussions1,2,3,4. Their effectiveness has been questioned1 2 3 4 5 6 7 8 9 10. As a matter of fact, the expe-
rience of the first sanction episode against Russia (2014-2017) was not conclusive, and obviously the same applies to the second one6,7,8,9,10.
However, another problem then emerged. The “collective West” hoped that sanctions could lead to a massive failure of the Russian economy. The actual reality was quite different with Russia suffering a moderate recession in 2022 and enjoying a strong
1 OHCHR and unilateral coercive measures [Internet]. [cited 2023 Dec 11]. Available from: https://www.ohchr.org/en/unilateral-coercive-measures
2 Olson RS. Economic coercion in world politics: With a focus on north-south relations. World Politics. 1979;31(4):471-494. https://doi.org/10.2307/2009906
3 Sapir J. Is the economic war against Russia turning against its initiators? In: Kostner S, Luft S, editors. Ukrainian war. Why Europe needs a new detente policy. Frankfurt am Main: Westend-Verlag; 2023. 352 p. (In Germ.)
4 Le mirage des sanctions economiques [Internet]. [cited 2023 Dec 11]. Available from: https://www.jean-jaures.org/publication/le-mirage-des-sanctions-economiques
5 Why the economic war against Russia has failed [Internet]. [cited 2023 Dec 11]. Available from: https://www.spectator.co.uk/article/why-the-economic-war-against-russia-has-failed
6 Bali M. The impact of economic sanctions on Russia and its six greatest European trade partners: A country SVAR analysis. Finance and Business. 2018;14(2):45-67.
7 Bali M, Rapelanoro N. How to simulate international economic sanctions: A multipurpose index modelling illustrated with EU sanctions against Russia. International Economic. 2021;168:25-39. https://doi.org/10.1016/j.inteco.2021.06.004
8 Giumelli F. The redistributive impact of restrictive measures on EU members: Winners and losers from imposing sanctions on Russia. JCMS: Journal of Common Market Studies. 2017;55(5):1062-1080. https://doi.org/10.1111/jcms.12548
9 Kholodilin KA, Netsunajev A. Crimea and Punishment: the impact of sanctions on Russian and European economies. SSRN Electronic Journal. 2016;(1569). https://doi.org/10.2139/ssrn.2768622
10 Sapir J. Has western sanctions against Russia Failed? In: Bali M, editor. Sanctions and the Impact of the Russia-Ukraine conflict. New-York: Nova Science Publishers; 2024.
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2024. Том 4. № 1
growth in 2023. This leads to a specific issue, which is quite disturbing for economists: what caused the growth forecasting errors made by both international economists and Russian institutions for 2022, 2023, and 2024?
RESULTS AND DISCUSSION Errors made on 2022
The sanctions taken by the EU or the United States have been significant11,12. They were imitated or taken up in part by a number of countries like Canada, Japan, Australia, Taiwan, South Korea, and Singapore. However, they were not taken up by all countries. Whether in Asia, Africa, or Latin America, many countries refuse to apply them, some of them denouncing the war waged by Russia on Ukraine. This list includes China, India, and Malaysia, as well as Mexico, Brazil, countries of the Persian Gulf, countries of the BRICS or candidates for BRICS membership, and Turkey, a country yet a member of NATO. This significantly weakens the scope of the current sanctions. The Western attempt to “isolate” Russia, either diplomatically or economically, has been at best a qualified success and, more probably, a failure.
Doomsday predictions have then been made by many, and especially by a team led by J. Sonnefeld at Yale University13. Their reasoning, little or badly sourced, seems to owe a lot to ideology and propaganda. Professor J. Galbraith debunked most of those arguments14,15. Similarly, the study carried out at the French Treasury Department by Mrs. Benassy-Quere provided some answers but did not avoid the bias of ideology either16. An overview of these forecasting errors was made in a paper published late in 2022: a team of colleagues from the Institute of Economic Forecasting of the Russian Academy of Sciences, led by professor Dmitry Kuvalin, studied the large dispersion of initial estimates17.
The World Bank then predicted a recession of -11.2% in April 2022, and again a recession of -8.9% in June (Table 118). So did some Russian institutions, e.g., the Ministry of Economic Development (-7.8% in May), the Institute of Economic Forecasting of the Russian Academy of Sciences, and the Central Bank of Russia. This study showed that the resilience of the Russian economy was largely underestimatedas showed by the actual results in late 2022 with a recession of only -2.1%.
Table 1. Forecasts and estimates of Russia’s growth under sanctions in 2022
Таблица 1. Прогнозы и оценки роста российской экономики в условиях санкций в 2022 году
OECD World Bank Bloomberg IMF (WEO) Min. of Eco. Dev, RF VEB.RF Central Bank of Russia Institute of Economic Forecasting -RAS FSGS
Apr-22 11.20% -9.50% -8.50%
May-22 -7.80% -10.20% -7.40%
11 Russia’s war on Ukraine: A sanctions timeline [Internet]. [cited 2023 Dec 15]. Available from: https://www.piie.com/blogs/realtime-economics/ russias-war-ukraine-sanctions-timeline
12 Fact sheet: United States, G7 and EU impose severe and immediate costs on Russia [Internet]. [cited 2023 Dec 15]. Available from: https://www. whitehouse.gov/briefing-room/statements-releases/2022/04/06/fact-sheet-united-states-g7-and-eu-impose-severe-and-immediate-costs-on-russia
13 Sonnefeld J, Tian S, Sokolowski F, Wyreblowski M, Kasprowicz M. Business retreats and sanctions are crippling the Russian Economy. SSRN Electronic Journal. 2022. https://doi.org/10.2139/ssrn.4167193
14 Galbraith JK. The gift of sanctions: An analysis of assessments of the Russian economy 2022-2023. SSRN Electronic Journal. 2023. https://doi.org/ 10.36687/inetwp204
15 James K. Galbraith - The effect of sanctions on Russia: A skeptical view [Internet]. [cited 2023 Dec 15]. Available from: https://braveneweurope.com/ james-k-galbraith-the-effect-of-sanctions-on-russia-a-skeptical-view
16 Le rouble qui cache la foret [Internet]. [cited 2023 Dec 15]. Available from: https://www.tresor.economie.gouv.fr/Articles/2022/06/20/russie-le-rouble-qui-cache-la-foret
17 Kuvalin DB. Russian economy under tough external sanctions: Problems, risks and opportunities. Economic and Social Changes: Facts, Trends, Forecast. 2022;15(6):79-93. (In Russ.) https://doi.org/10.15838/esc.2022.6.84.4
18 Right there.
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Continuation of Table 1
OECD World Bank Bloomberg IMF (WEO) Min. of Eco. Dev, RF VEB.RF Central Bank of Russia Institute of Economic Forecasting -RAS FSGS
Jun-22 -10% -8.90%
Jul-22 -6.00%
Aug-22 -4.70%
Sept-22 -5.50% -2.90% -3.70% -4.20% -3.10%
Oct-22 -3.40%
Nov-22 -3.10%
Dec-22 -2.30%19
Jan-23 -2.20% -2.20%20
Feb-23
Mar-23 -2.10% -2.10%21 22
Apr-23 22 -2.10%
Finally, another study tried to resort to alternative figures, based on the hypothesis that figures provided by the Russian Statistics Agency (ROSSTAT) are either no longer reliable or rigged23. This study was conducted by two researchers, A. Schmith and H. Sakhno, from the European Central Bank24. They used partial statistics on household consumption, some of which were collected by private Russian companies. However, these data are extremely fragile. Consumption figures depend on preferences for consumption and savings, i.e., preferences that were naturally modified by the new situation. In addition, the evolution of GDP was also affected by other parameters, in particular, with regard to industry. Finally, they did not take into account the hypothesis of a shift from household consumption centered on individual consumption to consumption
centered on collective goods (transport, infrastructure, etc.). This highlights the fragility of the study. Then, another paper supported the estimates computed by the two researchers. This paper relied on satellite data which showed that environmental pollution kept decreasing in some Russian regions in 2022, inferring that it proved a massive industrial recession25. However, the information they published was much less convincing that it sounded. Chemical industry, one of the main culprits for air pollution, was down in Russia up to March 2023 as exports to EU countries went down. The decrease was -6.7% for the second quarter of 2022, -4.6% for the third quarter, and -5.9% for the fourth26. This would make for the decrease in pollution detected by satellites. Chemical production, e.g., resin, plastics, coking coal, refined products,
19 Short-term analysis of GDP dynamics: December 2022 [Internet]. [cited 2023 Dec 15]. Available from: https://ecfor.ru/publication/kratkosrochnyj-analiz-dinamiki-vvp-dekabr-2022
20 Short-term analysis of GDP dynamics: January 2023 [Internet]. [cited 2023 Dec 15]. Available from: https://ecfor.ru/publication/kratkosrochnyj-analiz-dinamiki-vvp-yanvar-2023
21 Socio-economic Russia's situation [Internet]. [cited 2023 Dec 15]. Available from: https://rosstat.gov.ru/storage/mediabank/osn-02-2023.pdf
22 World economic outlook databases [Internet]. [cited 2023 Dec 15]. Available from: https://www.imf.org/en/Publications/SPROLLs/world-economic-outlook-databases#sort=%40imfdate%20descending
23 Les chiffres de croissance de la Russie sont-ils fiables? [Internet]. [cited 2023 Dec 16]. Available from: https://www.finance-gestion.com/vox-fi/ les-chiffres-de-croissance-de-la-russie-sont-ils-fiables
24 Available from: https://cepr.org/voxeu/columns/recession-russia-deepens-evidence-alternative-tracker-domestic-economic-activity
25 Russia’s economy is suffering from industrial decline as satellites detect less pollution in the air [Internet]. [cited 2023 Dec 16]. Available from: https:// markets.businessinsider.com/news/stocks/russian-economy-industrial-decline-air-pollution-satellite-data-ukraine-war-2023-5
26 On the production and use of gross domestic product (GDP) in 2022 [Internet]. [cited 2023 Dec 16]. Available from: https://rosstat.gov.ru/storage/ mediabank/22 20-02-2023.html
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etc., and metallurgy have a much higher pollution-to-GDP ratio than the industrial average. A production decrease of around -5% is generating a much more noticeable global pollution decrease. These branches had a depressed production level for a large part of 2022 and recovered only after February 2023.
Estimates for 2023 were actually following the same path as if no lessons had been learnt (Table 2 ). In a paper published in
December 2022, a Carnegie analyst predicted between three to five years of recession for Russia but gave no hard facts to support this analysis27 28 29 30 31 32 33 34 35 36. Actually, Russia emerged from the sanction-induced depression in the second half of 2023. The IMF was predicting a modest growth of 0.7% before moving up its forecasts37. In late March, the IEF-RAS made a forecast of -0.7%38. However, it revised its figures considerably on May 30, when it forecasted a 2.4% growth39 40.
Table 2. Forecasts evolution range in 2023
Таблица 2. Динамика прогнозов в 2023 г.
Forecasts made in 2023 for Russian growth in 2023
2023 BCS Financial Group IMF EU commission OECD World Bank Min. of Eco Dev. (RF) VEB.RFI CEMI- CR451 IEF-RAS
January
February
March -0.70%
April 0.71% 1.20% 0.80% 40 1.50%
May 0.90 1.00%
June -1.50%
July 1.50% -0.20% 2.30% 3.00%* 2.40%
August 2.00% 2.50%
September 2.80%
October 2.25% 2.00% 2.90%
27 Russia’s war economy expands more than forecast despite sanctions [Internet]. [cited 2023 Dec 16]. Available from: https://www.bloomberg.com/ news/articles/2023-08-11/russia-s-war-economy-is-on-course-to-recover-from-sanctions-hit
28 Download WEO data: April 2023 edition [Internet]. [cited 2023 Dec 16]. Available from: https://www.imf.org/en/Publications/WEO/weo-database/2023/ April
29 The global recovery is slowing amid widening divergences among economic sectors and regions [Internet]. [cited 2023 Dec 16]. Available from: https://www.imf.org/en/Publications/WEO/Issues/2023/07/10/world-economic-outlook-update-july-2023
30 Download World Economic Outlook database: October 2023 [Internet]. [cited 2023 Dec 16]. Available from: https://www.imf.org/en/Publications/ WE0/weo-database/2023/0ctober/weo-report?c=922,&s=NGDP_RPCH,&sy=2021&ey=2028&ssm=0&scsm=1&scc=0&ssd=1&ssc=0&sic=0&sort =country&ds=,&br=1
31 Russian Federation [Internet]. [cited 2023 Dec 16]. Available from: https://ec.europa.eu/economy_finance/forecasts/2023/autumn/autumn_ forecast-2023_ru_en.pdf
32 Forecast for other non-EU countries [Internet]. [cited 2023 Dec 16]. Available from: https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/ economic-forecasts/autumn-2023-economic-forecast-modest-recovery-ahead-after-challenging-year_en#forecast-for-other-non-eu-countries
33 La route est encore longue [Internet]. [cited 2023 Dec 16]. Available from: https://www.oecd.org/perspectives-economiques/juin-2023
34 Retablir la croissance [Internet]. [cited 2023 Dec 16]. Available from: https://www.oecd.org/perspectives-economiques/novembre-2023
35 Data for November 2023 is taken from the Interfax website. Available from: https://interfax.com/newsroom/top-stories/97040
36 The cost of war: Russian economy faces a decade of regress [Internet]. [cited 2023 Dec 16]. Available from: https://carnegieendowment.org/politika/88664
37 Download WEO data...
38 Quarterly GDP forecast. Issue № 57 [Internet]. [cited 2023 Dec 16]. Available from: https://ecfor.ru/publication/kvartalnyj-prognoz-vvp-vypusk-57
39 Short-term analysis of GDP dynamics: May 2023 [Internet]. [cited 2023 Dec 16]. Available from: https://ecfor.ru/publication/kratkosrochnyj-analiz-dinamiki-vvp-maj-2023
40 Previsions pour l’economie russe en 2023, par Jacques Sapir [Internet]. [cited 2023 Dec 16]. Available from: https://www.les-crises.fr/ previsions-pour-l-economie-russe-en-2023-par-jacques-sapir-russeurope-en-exil
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Continuation of Table 2
2023 BCS Financial Group IMF EU commission OECD World Bank Min. of Eco Dev. (RF) VEB.RF' CEMI- CR451 IEF-RAS
November 1.30% 3.50% 3.40% 3.30%**
December 3.60%*** 3.70%
Forecasts made in 2023 for Russian growth in 2024
2023 IMF EU commission OECD Min. of Eco Dev. (RF) VEB.RF' CEMI- CR451 IPE-RAS
January
February
March 1.60%
April 1.30% 2.20%
May 1.40%
June -0.40%
July 1.30% 1.90%
August 2.30%
September
October 1.05% 1.60%
November 1.60% 1.06% 2.30% 1.60/1.80%
December 2.40%**** 2.00%
1 VEB, Institute of Research and Expertise
*Average 2.5-3.5%, with 90% probability; “Average on 3.0-3.6%, 95% probability; ***Average on 3.4-3.8%, 95% probability; ****Average on 1.7-3.1%, 90% probability
By the summer, its forecasts were over 3.0%, and it ended the year of 2023 by predicting a growth of over 3.5%. The Ministry of Economic Development first published a forecast of 1.2%, which was more than the IMF predicted, followed by 2.8% in September and 3.5% in November41 42 43. The Central Bank of Russia was more conservative in predicting around 1.0% by April 2023 and then moved up its forecasts by 2.2% in July and 2.8% in October42,43. The VEB Research
Institute of the Bank for Foreign Economic Activities (Vnesheconombank) went from 0.8% in April to 3.4% in November 202344 45 46. On the other hand, the Russian scholar Oleg Bakun estimated that the Federal State Statistics Service (FSGS) provisional data were too conservative and gave estimates for 2023 at over 3.0% .
The spread of estimates for 2023 was then quite open. Nevertheless, it is clear that Russia’s economy
41 Russia raises 2023 GDP growth forecast, longer-term outlook worsens [Internet]. [cited 2023 Dec 16]. Available from: https://www.reuters.com/ markets/europe/russian-economy-ministry-improves-2023-gdp-growth-forecast-2023-04-14
42 Russian central bank official sees 2023 growth close to 1% [Internet]. [cited 2023 Dec 16]. Available from: https://www.reuters.com/markets/europe/ russian-central-bank-official-sees-2023-growth-close-1-2023-04-18
43 Macroeconomic survey of the Bank of Russia [Internet]. [cited 2023 Dec 16]. Available from: https://www.cbr.ru/eng/statistics/ddkp/mo_br
44 2023 estimates: Situation significantly better than expectations [Internet]. [cited 2023 Dec 16]. Available from: https://inveb-docs.ru/attachments/ article/2023_12/Otsenki_2023.pdf
45 Primary Rostat statistics for 2022 show that the Russian economy can be in plus in 2022 [Internet]. [cited 2023 Dec 16]. Available from: https://dzen. ru/a/Y_efs_g8ijHjSAGZ
46 Russia’s GDP for 2022 growed according to updated data of the trade balance surplus indicator for 2022 [Internet]. [cited 2023 Dec 16]. Available from: https://dzen.ru/aZZBRF7xiKGw3W6WN5
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was growing fast in 202347 48 49 50. However, much of this growth took place in the last three quarters and obviously surprised Russian forecasters. Forecasters from Western international economic institutions were wrong about Russia’s economic growth in 2023 - more or less the same way as they had been about 2022. They systematically underestimated the dynamics of the Russian economy (Table 2). This persistence of errors, and frequently serious ones, raises several questions. Nevertheless, the causes of mistakes in growth forecasting seem to be different for Russians and Westerners.
What were the main causes of growth forecast errors?
Some forecasting mistakes were certainly technical. The models used seemed uncapable of integrating sudden changes in trajectory or new econometric relationships between production, investment, and internal demand. This is particularly the case for DSGE (Dynamic Stochastic General Equilibrium) models, frequently used by international institutions and Central Banks48,49,50. These models are quite systematically used for forecasting growth51. Still, they are based on heavy microeconomic assumptions52.
Agents have behavior patterns they cannot change53 54 55. However, all the microeconomic surveys carried out in Russia in 2022 demo nstrated that agents actually did change their behavior and that companies were maximizing production volumes in hope of gaining market share as a condition for future profit maximization. The use of DSGE models then proved to be an obstacle in taking into account the shift in trajectory, and particularly of the Russian economy, but also changes in economic policy54,55.
However, technical problems cannot explain everything. Ideology certainly had an impact. It could be traced to the following disbelief, whether temporary or lasting: Western economists almost openly hold the Russian government incapable of initiative or innovative thinking.
These errors can therefore be due to ideological causes56 57 58 59. Many ideological assumptions, e.g., “Russians cannot run their economy without us Westerners” or “The corrupt Russian government can neither adapt nor react to sanctions”, are widespread in western countries and specifically in the EU administration57,58,59. The speech made by the French Minister of the Economy, Mr. Bruno Le Maire, on March 1, 2022, about the forthcoming “collapse” of the Russian
47 Russia GDP forecast for 2023: In june 2023 the Russian economy will transition to growth [Internet]. [cited 2023 Dec 16]. Available from: https:// dzen.ru/a/ZFu7NR19_A3NcQps
48 Clarida R, Gali J, Gertler M. The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature. 1999;37(4):1661-1707. https://doi.org/10.2139/ssrn.155910
49 Gall J, Gertler M. Macroeconomic modelling for monetary policy evaluation. Journal of Economic Perspectives. 2007;21(4):25-45.
50 Woodford M. Convergence in macroeconomics: Elements of the new synthesis. American Economic Journal: Macroeconomics. 2009;1(1):267-279. https://doi.org/10.1257/mac.k1.267
51 Adolfson M, Linde J, Villani M. Forecasting performance of an open economy DSGE model. Econometric Reviews. 2007;26(2-4):289-328. https:// doi.org/10.1080/07474930701220543
52 Fagiolo G, Roventini A. Macroeconomic policy in DSGE and agent-based models. Revue de l’OFCE. 2012;124(5):67-76. https://doi.org/10.2139/ ssrn.2011717
53 Storm S. Cordon of conformity: Why DSGE models are not the future of macroeconomics. International Journal of Political Economy. 2021;50(2):77-98. https://doi.org/10.1080/08911916.2021.1929582
54 Estrella A, Fuhrer JC. Monetary policy shifts and the stability of monetary policy models. The Review of Economics and Statistics. 2003;85(1):94-104. https://doi.org/10.1162/003465303762687730
55 Dockes P. Capitalism and its rhythms, four centuries in perspective: Volume 2, Splendors and misery of growth. Paris: Classiques Garnier; 2021. 1390 p. (In French)
56 Benveniste G. On a code of ethics for policy experts. Journal of Policy Analysis and Management. 1984;3(4):561-572. https://doi.org/10.1002/ pam.4050030406
57 A year after the invasion, the Russian economy is self-immolating [Internet]. [cited 2023 Dec 18]. Available from: https://insights.som.yale.edu/insights/ year-after-the-invasion-the-russian-economy-is-self-immolating
58 This is obviously the case for the so-called “Yale” paper which is grounded on just these assumptions. Sonnefeld J, Tian S, Sokolowski F, Wyreblowski M, Kasprowicz M. Business retreats and sanctions...
59 Available from: https://cepr.org/voxeu/columns/recession-russia-deepens-evidence-alternative-tracker-domestic-economic-activity
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economy obviously belonged to such assumptions60 61 62. The continuity of this ideology can be found in several declarations made by the US and other Western officials in 202361,62.
However, these “errors” could have a political cause, too, in relation to the conflict in Ukraine. They were intended to diffuse a representation of Russian weakness in order to convince Western public that the war would be easy to win, maybe, just by economic coercion, and that no hard sacrifice would be needed to support Ukraine63. Thus, when the OECD and the World Bank maintained their negative forecasts for 2023 as late as in June and July 2023 (Table 2), while the data on Russian economic growth had been accumulating since March-April 2023, we are right to ask ourselves which of these errors were technical and which were caused by an ideological or/and political bias.
Conversely, the IMF was characterized by a certain neutrality, which allowed its forecasts, with three revisions, to approach the actual growth results. Of course, the IMF changed its forecasts qui-teslowly. But it is to be remembered that the July revisions incorporated at best the figures published
in June 2023 and even, most probably, only those from May. Likewise, the publication of data for the month of October was most likely representative of the data available for August. The Moscow Institute for Economic Forecasting announced a yearly growth of 2.5% in August 2023, which made the IMF’s October forecast (2.25%) entirely realistic or at least not much worse than the Russian estimates. The relative slowness of the process of publishing growth forecasts at the IMF was due, on the one hand, to the scale of the data processed and, on the other hand, to the verification procedures, both technical and political, which necessarily take time. As in 2022, the IMF was characterized within Western economic institutions by the quality of its technical work, which was relatively little influenced by ideological or political issues.
Some Russian errors, too...
Problems concerning the nature of forecasting models also explain why some Russian forecasters were also initially wrong (Tables 364 and 4), although to a much lesser extent than Western ones and with a much more rapid reaction during 2023 for the IEF.
Table 3. Forecasts made by the Central Bank of the Russian Federation and the IEF-RAS
Таблица 3. Прогнозы Центробанка РФ и Института экономического прогнозирования РАН
Date Feb-23 Mar-23 Apr-23 Jun-23 Jul-23 Sept-23 Oct-23 Dec-23
CBR - Max. forecast 0.4% 0.8% 1.0% 1.9% 2.5% 3.1% 3.0% 3.6%
CBR - Min. forecast -6.5% -5.0% -2.5% -1.5% 0.7% 1.2% 1.5% 2.0%
CBR - Forecast with probability of 90% -0.4% 0.3% 0.8% 1.5% 2.2% 2.7% 2.8% 3.4%
IEF-RAS (KAD-VVP) -1.70% -0.40% 0.30%65 3.10% 3.60% 3.60% 3.70% 66
KAD-VVP : Short-term analysis of GDP dynamics
60 Bruno Le Maire: “Nous allons provoquer l’effondrement de l’economie russe” [Internet]. [cited 2023 Dec 18]. Available from: https://www.bfmtv. com/economie/economie-social/bruno-le-maire-nous-allons-provoquer-l-effondrement-de-l-economie-russe_AN-202203010131.html
61 Sanctioning evasion network supporting Russia’s military-industrial complex [Internet]. [cited 2023 Dec 18]. Available from: https://ua.usembassy. gov/tag/russias-military-industrial-complex
62 Consequences of the defeat of Russia [Internet]. [cited 2023 Dec 18]. Available from: https://nadinbrzezinski.medium.com/consequences-of-the-defeat-of-russia-ec7e12c9971c
63 Russia’s economy is starting to come undone [Internet]. [cited 2023 Dec 18]. Available from: https://www.wsj.com/articles/russias-economy-is-starting-to-come-undone-431a2878
64 Macroeconomic survey of the Bank of Russia [Internet]. [cited 2023 Dec 20]. Available from: https://www.cbr.ru/eng/statistics/ddkp/mo_br
65 Short-term analysis of GDP dynamics: April 2023 [Internet]. [cited 2023 Dec 20]. Available from: https://ecfor.ru/publication/kratkosrochnyj-analiz-dinamiki-vvp-aprel-2023
66 Short-term analysis of GDP dynamics: December 2023 [Internet]. [cited 2023 Dec 20]. Available from: https://ecfor.ru/publication/kratkosrochnyj-analiz-dinamiki-vvp-dekabr-2023
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Table 4. Time evolution of IEF-RAS forecasts
Таблица 4. Динамика прогнозов Института экономического прогнозирования РАН
Forecast for Made in Q1 - 2023 Q2 - 2023 Q3 - 2023 Q4 - 2023 2023 2024
KAD-VVP, 17/02/2023 -4.00% -1.70% -0.70% -1.70%
KP-VVP n°57, 9/03/202367 -0.70% 1.60%
KAD-VVP, 20/03/2023 -2.60% -0.40% 0.50% -0.40%
KAD-VVP, 11/04/202368 69 -2.00% 0.30% 1.30% 1.30% 0.30%
KAD-VVP, 19/05/2023 3.10% 3.90% 4.00% 2.40%
69 KP-VVP n°58, 26/05/2023 1.00% 1.40%
KAD-VVP, 17/07/2023 3.30% 3.80% 3.70% 2.30%
KAD-VVP, 24/07/2023 4.10% 4.60% 4.90% 3.10%
KAD-VVP, 17/08/202370 71 5.40% 6.00% 3.80%
71 KP-VVP n°59, 28/08/2023 2.50% 2.30%
KAD-VVP, 20/09/2023 5.10% 5.70% 3.60%
KAD-VVP, 19/10/2023 5.10% 5.60% 3.60%
KAD-VVP, 17/11/2023 5.90% 3.80%
KP-VVP n°60, 06/12/202372 73 3.30% 2.00%
73 KAD-VVP, 11/12/2023 5.80% 3.70%
Results (ROSSTAT) -1.80% 4.90% 5.50%
KP-VVP: Quarterly GDP forecast; KAD-VVP: Short-term analysis of GDP dynamics Indicated dates are the one of the issuing process, and not of publication
Two observations should immediately be made regarding the forecasts published by the Central Bank of the Russian Federation. First of all, the variation interval was quite considerable at the start of the period with 690 points in February 2023, followed by 580 points in March, before falling to 350 points in April and June and reaching around 150 points in October 2023. If at the very beginning of the year a large variation interval is not exceptional (usually coupled with a low probability range), it is still infrequent to be of such size. Remember that 680 points are far
over an interval going from -2.1% (the actual results for 2022) to +2.5%. This indicates, at the very least, the instability in the model used by the Central Bank, which appears to have been inspired by the DSGE models, but also, most likely, an internal conflict within the forecasting team.
The data from the Institute of Economic Forecasting of the Russian Academy of Sciences (IEF-EAS) showed another problem. This institute used a different model, with no less than 2000 variables and 200 equations74. This model was based on a sequential
67 Quarterly GDP forecast. Issue № 57 [Internet]. [cited 2023 Dec 20]. Available from: https://ecfor.ru/publication/kvartalnyj-prognoz-vvp-vypusk-57
68 Short-term analysis of GDP dynamics: April 2023...
69 Quarterly GDP forecast. Issue № 58 [Internet]. [cited 2023 Dec 20]. Available from: https://ecfor.ru/publication/kvartalnyj-prognoz-vvp-vypusk-58
70 Short-term analysis of GDP dynamics: August 2023 [Internet]. [cited 2023 Dec 20]. Available from: https://ecfor.ru/publication/kratkosrochnyj-analiz-dinamiki-vvp-avgust-2023
71 Quarterly GDP forecast. Issue № 59 [Internet]. [cited 2023 Dec 20]. Available from: https://ecfor.ru/publication/kvartalnyj-prognoz-vvp-vypusk-59
72 Quarterly GDP forecast. Issue № 60 [Internet]. [cited 2023 Dec 20]. Available from: https://ecfor.ru/publication/kvartalnyj-prognoz-vvp-vypusk-60
73 Short-term analysis of GDP dynamics: December 2023...
74 Shirov AA, Brusentseva AR, Savchishina KE, Kaminova SV. Predictive and analytical capabilities of macroeconomic models in conditions of crisis economic development (using the example of the QUMMIR model). Economic and Social Changes: Facts, Trends, Forecast. 2022;15(6):35-51. https:// doi.org/10.15838/esc.2022.6.84.2
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iterative calculation of forecast indicators of economic dynamics in increments of one quarter75 76 77. The calculation of the dynamics of macroeconomic indicators is carried out in the logic of demand: population, business, and the state.
Demand is formed depending on the income level, as well as the structure and volume of savings of economic entities. According to the estimates of the team running the model, sanctions could be compared to a massive and exogeneous macroeconomic shock, something quite similar (in principle) to the COVID-19 crisis76,77. The crisis features induced by the sanctions were, for the period of negative GDP dynamics, associated both with restrictions on the supply of imported products and decisions of unfriendly countries to abandon Russian energy carriers and raw materials. In such conditions, a certain period of adaptation of the Russian economy to the changes in the structure of production, income, and prices was to be required.
We understand, too, following the long-standing cooperation with colleagues of the IEF-RAS, that the Institute’s researchers were wary of any optimism that would not have been really founded. Overoptimistic views are quite severely castigated among Russian economists, and for perfectly understandable reasons. This could introduce a downward bias in forecasts in Russia. If we turn to French institutions like the INSEE (National Institute for Statistics and Economic Studies) or the REXECODE (Research Center for the Expansion of the Economy and Business Development), we will find the same cautious approach, as well as some significant errors in their
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forecasts78 79 80. The INSEE is not afraid to make corrections in its forecasts and even estimates79,80. It is not infrequent to have results for a given quarter with changes between estimates and definitive figures by at least 50 points. The main errors in the INSEE model were those affecting the calculation of fiscal income elasticity to the economic situation81. On the other hand, the INSEE is much less optimistic than the Banque de France forecasts department, which, quite frequently, is making optimistic forecasts. It is clear that the IEF-RAS uses a complex model whose designers were well aware that it was potentially sensitive to significant, large-scale exogenous shocks, such as sanctions. Alexander Shirov, who led the team in charge of the model, admitted openly at the June 2022 session of French-Russian seminar that underestimating imports volume had led to a strong downward bias in the initial forecasts. For 2023, it was underestimating private investment and the amount of private consumption that again made initial forecasts largely underestimate Russian economic growth. But, to the credit of the IEF-RAS, one has to add that when the actual figures for both investment and consumption became known, the results improved quite quickly. The forecasts made by the IEF-RAS thus kept improving from the end of spring 2023 onwards, and the general trend of the Russian economy was well described by the forecasts made after May 2023.
What were the alternatives?
Problems encountered by some Russian forecasters underline both the methodological frailty of some models (like the DGSE-inspired ones) and some spe-
75 Almon K. Iskusstvo ehkonomicheskogo modelirovaniya [The art of economic modeling]. Moscow: MAKS Press; 2012. 642 p. (In Russ.)
76 Bardazzi R, Ghezzi L. Large-scale multinational shocks and international trade: A non-zero-sum game. Economic Systems Research. 2021;34(2).
77 Klepach AN. Russian economy: The coronavirus’ shock and the recoveryprospects. Scientific Works of the Free Economic Society of Russia. 2020;222(2):72-87. (In Russ.) https://doi.org/10.38197/2072-2060-2020-222-2-72-87
78 Croissance en France: de la prevision economique a la realisation [Internet]. [cited 2023 Dec 21]. Available from: http://www.rexecode.fr/public/ Analyses-et-previsions/A-noter/Croissance-en-France-de-la-prevision-economique-a-la-realisation#:~:text=Les%20instituts%20ont%20alors%20
effectue,2000%2D2022%20hors%202020
79 Cling J-P, Fayolle J. INSEE’s economic forecasts since 1969. Economics and Statistics. 1986;192:21^2. (In French) https://doi.org/10.3406/estat.1986.2502
80 Chevillon G. Econometric analysis and understanding of forecast errors. Revue de l’OFCE. 2005;95(4):327-356. (In French) https://doi.org/10.3917/ reof.095.0327
81 Laffeter Q, Pak M. Elasticities of tax revenues to the economic cycle: Study of three taxes over the period 1979-2013 in France. Paris: Insee; 2015. (In French)
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cific difficulties in running a complex model in times of dramatic changes82. Household behavior can change rapidly, and so can enterprises when they see a new market opening. Assumptions like the stability of microeconomic behavior are one of the main defects of “classical” models83 84 85. Even if we could add a specification about behavior changes, the time needed to recompute a complex relation would doom the model when the rapid changes came. Actually, when the economy is quickly shifting from a given situation to another one, complex models like those used in large economic institutions are probably irrelevant.
By the way, there is another factor that has been pushing, for some time, “classical” models towards irrelevancy. It could be suspected, as early as in June 2022, that the Russian economy was much more constrained by supply than by demand84,85. Actually, we have seen such a situation develop in Western economies after the COVID-19 crisis. The fact that consumption has been restrained by lockdowns and that supply chains were disorganized by the pandemics created a situation where instant supply became more important than demand to control economies. Combined effects of Western sanctions and military operations in Ukraine created such a situation for the Russian economy. But, if supply was more important than demand to understand economic dynamics, it had extremely important consequences for modelling growth. These factors have pushed the CEMI-CR451 to develop a much simpler forecasting model in an attempt to overcome difficulties encountered by much more complex ones.
This relatively simple model was based on the significantly reduced numbers of relations between usable labor force and labor productivity, as well as on the impact of investments on it and production. This model has proved more robust, at least until the Russian economy settles again into a stable tra-
jectory (where a more complex model is definitely superior) and again becomes an economy constrained by demand and not by supply. The low relevancy of classical demand factors could be deduced from the specific situation the Russian economy has faced since the end of spring 2022. Import-substitution mechanisms, demand for military hardware, and the fact that households refrained their demand for some time before increasing dramatically the way it was in France during the COVID-19 crisis - all these factors had 18 months to build up in a situation where supply was the most important factor constraining the economy. It could then be quite easily deduced, from some assumptions of the actual workforce and labor productivity, what the growth would be.
This would explain why the simple model used by the CEMI-CR451 proved apparently so effective. As early as in July 2023, the model forecasted a growth rate of 3.0% (with a variation interval of 100 points compared to 180 points for the BCR model), before settling on 3.3% (with an interval of 60 points in November), then on 3.6% (with an interval of 40 points) in December 2023. Likewise, the CEMI-CR451 forecast of December 2023 of growth for 2024 is 2.4% (with an interval of 140 points) while that of the Central Bank of Russia is 1.7% (with an interval of 150 points), while the forecast given by the IEF-ASR is 2.0%. Remember that the current forecasts from Western economic institutions are of the order of 1.0%.
The model used by the CEMI-CR451 was then effective but not fool-proof. Actually, the model severely underestimated the growth during the first quarter of 2023. It has to be explained what the reason were and why.
A real surprise
There is no dispute that colleagues from the IEF-ASR and the CEMI-451 were surprised by the events
82 Gall J. Monetary policy, inflation, and the business cycle: An introduction to the new Keynesian framework. Princeton: Princeton University Press;
2008. 216 p.
83 Orphanides A, Williams JC. Robust monetary policy with imperfect knowledge. Journal of Monetary Economics. 2008. https://doi.org/10.2139/ ssrn.1007805
84 The distinction between both is, of course, based on Kornai J. Economics of shortage. Vol. 2. Amsterdam: North-Holland Publishing Company; 1980.
631 p.
85 Vahabi M. Introduction: A special issue in honoring Janos Kornai. Public Choice. 2021;187:1-13. https://doi.org/10.1007/s11127-021-00887-w
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Employed population ------------Three months average mean
Fig. 1. Employed population (millions)
Рис. 1. Работающее население РФ, млн чел.
that took place between February and April 2023. The same can be said for the VEB research institute. If the CEMI-CR541 and our colleagues in the IEF-ASR were expecting by the winter of 2022-2023 that Russian economy would return to growth in 2023, it was forecasted that such an event would happen in the third or even the fourth quarter of 2023. The discussions held at the November 2022 session of the French-Russian seminar proved that. We were then all surprised by the strength of this recovery and by the fact that it appeared so early, at least a quarter in advance (for the most optimistic of us), and, maybe, even two. One could think in hindsight that we all underestimated the dynamics of an economy no more constrained by demand, as well as the adjustment capabilities of Russian enterprises. It is also quite probable that the cumulative effects of investments
were underestimated. In the case of the CEMI-CR451, this surprise was related to two factors:
- The growth in the employed population: it increased by 2 million in the first 10 months of 2023 when only 1 million was expected - at least, by the CEMI-CR451. Alexander Shirov said at the June 2022 session of the French-Russian seminar that sanctions would make it mandatory for Russia to increase the number of people employed. However, we clearly underestimated the total number;
- The speed with which the labor productivity returned to its level of the end of 2021 and the very beginning of 2022 after a fall of -5% in the second and third quarters of 2022. This was a very positive surprise, but one that made our forecasts to be on the pessimistic side.
Figure 186 shows that the increase in employed population had two distinct phases. From March to
86 Compiled according to Rosstat data.
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------Real wage ('Yon')) ......Mean average (3 months)
Fig. 2. Real wages
Рис. 2. Реальные доходы населения РФ
December 2022, it just recovered its December 2021 level. However, the increase that started in December 2022 was really spectacular and lasted till August 2023. The employed population growth was of 2.1 million in 8 months or 2.8%. It was expected that the employed population would grow, but certainly not in such proportions. The Russian economy had largely recovered from the COVID crisis by the beginning of 2022. As a result, this huge employed population growth came as a surprise.
This, of course, had a direct impact on the growth of real wages (Fig. 287). The real wages decrea-
sed from April 2022 to October 2022 as a consequence of sanctions induced by the high inflation in the second and third quarters of 2022. The situation then improved with a sharp decrease in inflation and a strong push on nominal wages. However, the situation changed dramatically after April 2023 as the labor force reserves were probably exhausted. This was a consequence of the very strong increase in employed population we saw since December 2022.
The activity rate reached unprecedented levels, and the relation between the growth rate of real
87 Compiled according to Rosstat data.
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0.974
0.972
0.970
0.968
0.966
0.964
0.962 S
0.960
0.958 о <C
0.956 0.954 0.952 0.950 0.948 0.946 0.944
^cn^^otSoodso^cScn^j-thsoiSoodsO'^-'cScn^j-th OOOOOOOOOOOOOOOOOO^^^^^^
Realwagegrowth(year toyear)
Fig. 3. Comparison between real wage growth (year to year) and activity rate (employed population vs. active population) (March 2021 - October 2023)
Рис. 3. Сравнительный анализ роста реальных доходов и экономической активности населения: работающее население и экономически активное население (март 2021 г. - октябрь 2023 г.)
April 2022 to August 2023 y = 0.0514a; + 0.9118 R = 0.8556 Ocl . 202 3
-
"" •V
>
f
Api A.
.202 2
TV/T МП
to March 2022 (exit from the Covid-19 crisis) y = -0.0762a + 1.033 R = 0.1147
wages and the activity rate changed dramatically (Fig. 388)89 90 91. Actually, this change became obvious as early as in April 2022.
As a result, we obtain a kind of relation that resembles the famed Phillips curve90,91. Of course, we are not comparing unemployment and inflation but searching for a relation between employment reaching new levels with an activity rate now approaching 1 and the growth rate of real wages. Studies have shown that in a “high pressure” economy the Phillips
curve could well make a reappearance92. And quite clearly, the relation between the real wage growth and the activity rate changed from April-May 2022 to August 2023. The change of economic dynamics is clear. However, one thing that was underestimated was its cumulative nature.
To compensate for the labor productivity slump but also to develop their activities both for military purposes and for import substitution, Russian enterprises increased the number of population emp-
88 CEMI-CR451 computation and Rosstat.
89 Or the ratio between employed population and active population.
90 Del Negro M, Lenza M, Primiceri GE, Tambalotti A. What’s up with the Phillips curve? SSRN Electronic Journal. 2020.
91 Doser A, Nunes R, Rao N, Sheremirov V. Inflation expectations and nonlinearities in the Phillips curve. Journal of Applied Econometrics. 2023;38(4):453-471. https://doi.org/10.1002/jae.2963
92 Hooper P, Mishkin FS, Sufi A. Prospects for inflation in a high-pressure economy: Is the Phillips curve dead or is it just hibernating? Research in Economics. 2020;74(1):26-62. https://doi.org/10.1016/j.rie.2019.11.004
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CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CT CO cs CO cs CO cs CO cs CO cs CO cs CO cs CO cs CO cs CO cs CO cs
§ 3 jd <o pH «3 s Sh <: rO s d £ bh c cL GO о > о £ ■ a § •—3 jd <o pH «3 s s— <: rO s d £ bb c cL CO ■ о > о £
PIB Growth, YonY, / Employed population growth, YonY ............Mean average on 3 months
Fig. 4. Labor productivity variations
Рис. 4. Динамика производительности труда
loyed (Fig. 493). By the end of 2022, they had recovered the already high activity rate of the end of 2021 and went farther.
When the activity rate went over 96.5%, the real wages began to increase sharply. When the threat of unemployment disappeared, it led to a strong increase in household consumption that went adding its weight on the activity surge. It was this increase in household consumption that “surprised” economists. However, conditions for this increase were clearly in place by December 2022 - March 2023.
Now, it is quite clear that we cannot expect a similar increase in 2024. Employed population seems to have reached its upper limit. Considering the growing immigration flow of employed population, it will be quite low for the coming year. Nevertheless, labor productivity has been growing steadily since March 2023 and is now returning to the level it showed in late 2021 - early 2022.
The combination of these two factors explains why the final results exceeded the forecasts made in the early spring or summer of 2023 and why the prospects for 2024 are reasonably good. The rapid growth in productivity demonstrated the progresses made by companies, be they private or public, in reorganizing themselves to increase production. This growth proves that the sanctions have faltered much more quickly than expected, having lost a very large part of their effects from the third quarter of 2023. We all expected this rather towards the end of the second quarter of 2024, or even by the end of 2024. Certainly, imports from China had played a certain role, but they could notexplain everything94. Still, the situation where the Russian economy was to be constrained by supply and not by demand is not to stay forever. That is why forecasts for 2024 are clearly less optimistic than those for 2023.
93 CEMI-CR451 computation and Rosstat.
94 China’s exports to Russia: Overall trend and key products [Internet]. [cited 2023 Dec 22]. Available from: https://silverado.org/news/silverado-china-s-exports-to-russia
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CONCLUSION
It has then to be reminded that the “2023 surprise” was not the first in Russia’s economic history. Economists had already been surprised at least twice by the strength of Russia’s economic recovery. The first time was after the financial crisis of August 199895. The second was after the COVID-19 crisis. Now economists got surprised by its recovery after the sanctions. The two last episodes are an indirect proof of the good health
of the Russian economy. In general, economy is more akin to a living organism than to a mechanism, as the late professor Viktor V. Ivanter repeatedly stated96,97. This is what makes the reaction capacities of the productive system in times of crisis very difficult to predict indeed. However, for economists, it is always necessary to make forecasts at the risk of being wrong. In this matter, humility and modesty are always required.
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THEORY AND PRACTICE
2024. Vol 4. No 1
Sapir J. Strategic View: why Forecasters... https://doi.org/1Q.21603/2782-2435-2Q24-4-1-27-46
CONFLICTS OF INTEREST: The author declared no potential conflicts of interests regarding the research, authorship, and/or publication of this article.
ABOUT AUTHOR: Jacques Sapir, Foreign Member of the Russian Academy of Sciences, Professor, Member of the French Academy of Sciences, Director, Center for the Study of Industrialization Modes (Paris, France); Visiting Professor at the Department of Economic and Financial Strategy of the Moscow School of Economics, Lomonosov Moscow State University (Moscow, Russia); sapir@msh-paris.fr
КОНФЛИКТ ИНТЕРЕСОВ: Автор заявил об отсутствии потенциальных конфликтов интересов в отношении исследования, авторства и/или публикации данной статьи.
ИНФОРМАЦИЯ ОБ АВТОРЕ: Сапир Ж., Академик, Иностранный член РАН, профессор, член Французской академии наук, директор, Центр изучения режимов индустриализации (Париж, Франция); визит-профессор кафедры экономической и финансовой стратегии Московской школы экономики, Московский государственный университет имени М. В. Ломоносова (Москва, Россия); sapir@msh-paris.fr
