Assessing the impact of emigration on the Russian economy
February 17, 2023
  • Maxim Blant
    Economic commentator, Radio Free Europe/Radio Liberty
Maxim Blant writes that even though Russians working remotely from abroad are technically contributing to the country’s GDP, they are also taking out enormous funds from the Russian economy and aggravating the contraction in consumer demand. State spending on the war might make up for that, but it seriously undermines financial stability.
Alexander Auzan, Dean, Department of Economics, Moscow State University. Source: Wiki Commons
Since the outbreak of the war in February 2022, the Russian economy has faced unprecedented sanctions levied by developed countries, as well as two waves of so-called “relocation” by Russian citizens. The first began on February 24, the day Russia started bombing Ukraine. The second came on September 21, when a partial mobilization was decreed by Putin.

Moscow State University Department of Economics Dean Alexander Auzan estimates that by the beginning of February 2023, 1.5-2.0 million people had left Russia because of the war, “having taken with them very significant skills.” Replacing will be difficult. “As a person involved in the production of human capital, and as a university professor and dean, I want to tell you that human capital is produced slowly. We are unlikely to be able to reproduce what we have lost earlier than in 7-10 years,” Auzan said at the 7th Perm Economic Congress.

It is practically impossible to confirm or refute Auzan’s assessment. Most people who left are simply invisible to the official statistics. They remain registered at their place of residence, receive on their Russian bank cards pensions and social benefits, and pay taxes and loans. Those who can work remotely at Russian companies and institutions (including state ones) are in no hurry to part with their source of income. During the pandemic, it was not only IT specialists who learned to work remotely, but also accountants, marketing specialists, teachers, editors and various other professionals – almost everyone whose work does not require their physical presence in a field, at a machine or behind a cash register.

Moreover, since the borders are not closed, those who are not directly threatened by mobilization or political persecution periodically come back to Russia to settle outstanding matters: to sell or rent an apartment, sell a car, replace an expired passport, pick up things, or even just go to a doctor who they know. Does that mean that their departure from Russia has not affected the country’s economy in any way? Obviously not, although the effect can only be estimated approximately and through proxy data.

GDP and military-industrial potential

The state of any country’s economy is usually assessed by the dynamics of gross domestic product, or GDP. If it rises, everything is fine – the economy is growing. If it shrinks, then everything is going wrong. It is GDP that is cited by Russian officials, led by Vladimir Putin, as evidence of the Russian economy’s robustness. According to the latest official estimates, Russian GDP shrank just 2.5% in 2022. That marked a much more modest decline than what the Central Bank and the Ministry of Economic Development had predicted in the first months of the war.

At first glance, the figure represents a really good economic performance for a warring country against which unprecedented international sanctions were imposed. However, we should not forget that when calculating GDP, government spending is also taken into account. Last year, expenditures exceeded RUB 31 trillion – RUB 7.5 trillion more than had been planned before the war. If it was not for that – if the Ministry of Finance had simply followed the approved budget law – GDP would have fallen by 8%. The lion’s share of the money was “eaten up” by the war. That is, the state purchased guns, tanks, shells and cartridges and paid for them to be delivered to the war zone. It spent trillions on the destruction of Ukrainian cities and the country’s power system, the murder of tens of thousands of its own and Ukrainian citizens. That is what kept the economy from collapsing. In fact, what was called the Russian economy before the war shrank by 8%.

Technically speaking, the Russians who left but continue to receive salaries, pensions and/or social benefits in Russia contribute to Russian GDP. The indicator is calculated such that it includes all expenditures – from a pensioner buying bread at a nearby bakery to the state purchasing tanks with taxpayer money. It was the contribution of government spending to GDP that mostly provided for the unexpected “robustness” of the Russian economy in 2022. The government simply increased public spending by a third.
"This does not mean at all that, thanks to people who left and their statistical contribution to GDP, the Russian government’s opportunities to continue the war are growing. Generally speaking, it is quite the opposite."
Take, for example, someone from an entirely peaceful profession – an instructor at a state university in Moscow who teaches Latin and Greek. After the outbreak of the war, he left Russia, but continues to teach from abroad. Convinced that the state has been taken over by a group of criminals and become a criminal organization, the classics professor is morally uncomfortable. Thus, he believes that he is working for a criminal organization since he receives a salary at the state university and thus contributes to Russian GDP. However, it would be incorrect to say that he is contributing to the war. His salary is part of government spending and is included in GDP, though it does nothing for the war economy. In fact, it takes away from it. His teaching of Latin and Greek, for which the state pays him money, is a relic of peacetime, a public good that not every society can afford. It would be more “beneficial” for the current Russian state to use that money to equip and send a couple of mobilized men to the front.

Amid the serious budget deficit that Russia has been running since the end of 2022, receiving money from the state for activities not related to the war or the suppression of dissent further undermines the country’s financial stability. Of which little is left. And without financial stability, the threat of social upheaval grows. Forget about pensions and social benefits: even in peacetime, on the back of the country’s demographic crisis, paying them out was a great test for the Russian economy, so against the backdrop of skyrocketing military spending, they have become almost an unaffordable luxury. And there is no big difference where the recipient of a salary or pension is physically located – in Russia or abroad.

Based on this logic, university Latinists, due to their low salaries, are doing much less damage to Russian financial stability and its military-industrial potential than every Duma deputy and most officials, such as Deputy Secretary of the Security Council Dmitri Medvedev. They do not bring any benefit, while with the money spent on supporting them, you could equip a full army. But back to those who left. From an economic point of view, it is important not only where they earn money, but also where they spend it.

Capital outflow

On February 10, the Central Bank updated its medium-term forecast and estimates of key macroeconomic indicators for 2022. Capital outflow amounted to a record $ 217 billion, triple the amount in 2021 ($ 72 billion) and quadruple that in 2020 ($ 50 billion). It outdid by a whopping $ 67 billion the previous record, which was set in 2014 after the annexation of Crimea and the first batch of international sanctions.
"Importantly, the record capital outflow took place even though the unprecedented international sanctions significantly complicated getting money out of Russia and the Central Bank put in place unprecedented restrictions."
Russian household deposits with nonresident banks. Source: The Central Bank of Russian Federation
The latter were aimed at both preventing the withdrawal (and physical export) of hard currency and making it as unattractive as possible to keep it at Russian banks. The accrual of interest on FX deposits – even the smallest – was canceled; instead, a fee for holding currency was introduced. Most currency operations became unavailable, with devastating commissions put in place for other transactions.
Before, even a simple currency exchange was included in the capital outflow statistics (you bought dollars or euros with part of your salary in the Sberbank or VTB mobile app and kept them on your account at that bank – this would be an outflow), but now, for the most part, it is money that has physically left the country. And in different ways. One of the legal ways is to open an account in a “friendly” country (Georgia, Armenia, Kazakhstan, Uzbekistan, Tajikistan or even Turkey) and transfer even just rubles there. Then convert them into the local currency at the rate set by the bank.

The dynamics of such operations over the past year is very telling. On February 13, the Central Bank put out fresh data that showed that from February to December 2022, Russians transferred RUB 4 trillion to their accounts in foreign banks, or approximately $ 60-65 billion. A more precise dollar amount is hard to get at due to volatility in the dollar exchange rate, which in 2022 fluctuated in Russia from RUB 50 to RUB 180 (financial stability!), while daily swings during the most stressful periods were too big.
The figures are broken down by month, starting in 2018. Before the war, the monthly outflow did not exceed RUB 50 billion in a month. The pre-war record of RUB 51 billion was set back in May 2021, when, in the wake of pandemic-related travel bans, Russians rushed out of the country as soon as they could. The rest of the period, the monthly figure fluctuated from RUB 20 billion to RUB 40 billion. January 2022, the last full month before the war, was no exception, at about RUB 34 billion.

In February 2022, almost RUB 332 billion was transferred into accounts at nonresident banks. It was people who managed to take advantage of the shock that took hold of the Central Bank following the outbreak of hostilities. The restrictions were put in place only in March, and before the introduction of international sanctions against the financial sector. From March to May, the outflows declined, though they never dropped below RUB 100 billion a month. In June, the ruble bounced back strongly against the dollar thanks to a dramatic drop in imports, high prices for Russian commodities and the restrictions on the Russian FX market. The official dollar exchange rate fell to RUB 50. The budget of the state and Russian commodity exporters started to show cracks. Back in May, the Central Bank loosened the reins somewhat, quintupling the monthly limit for transferring funds to own accounts at foreign banks.

In the meantime, Russians realized that Putin’s blitzkrieg was not working. The result was that a new surge in private outflows from Russia followed in June that reached RUB 293 billion. In September, amid the so-called partial mobilization, transfers to accounts at foreign banks exceeded RUB 500 billion. The high mark for the year came in November at RUB 561.5 billion.

Money flowed out of the country not only to accounts at foreign banks. Part of it was simply taken out in cash by emigrants. In a 2023 interview, Andrei Kostin, the head of Russia’s second-largest state-owned bank VTB, said that in the first two weeks after the start of the war, VTB clients took out $ 26 billion of hard currency in cash. It is safe to say that at Sberbank, Alfa Bank and Tinkoff Bank, the figures were similar. That currency has not come back to banks either (at least not Russian banks).

There is another channel through which people who left the country withdraw their money – cryptocurrencies.
"After the outbreak of the war, the volume of crypto operations in Russia jumped 3-5 times, while a similar surge was seen at the end of September, in the wake of the mobilization. Analysts widely agree that these spikes reflect money leaving Russia."
It would not be entirely correct to say that the more than $ 200 billion that flowed out of the country damaged the Russian economy. It smoothed out the anomalous situation that had emerged in the Russian FX market in the first months of the war, when revenues from commodity exports (primarily gas) soared and imports collapsed (due to sanctions and the departure of international brands operating in Russia). However, by the end of the year, the steady flow of money out of the country became burdensome for the economy, affecting, among other things, the dollar exchange rate, which fell from RUB 50 to RUB 72 in the second half of the year.

Effective demand contracting

At every press conference following a rate decision throughout the 10 months of the war last year, Central Bank Chair Elvira Nabiullina spoke about the changes in consumer behavior and the contraction of effective demand. It is appropriate to look at durable goods to gauge savings and changing consumer behavior. Meanwhile, when it comes to fast-moving consumer goods (FMCG) – e.g. food and hygiene products – there is usually not a reduction in physical sales but a preference for cheaper brands.

According to data released in January 2023 by NielsenIQ, however, the FMCG market saw a serious decline in volumes. In 2022, Russians bought 3.4% less goods than a year earlier. There is no doubt about the representativeness of the NielsenIQ estimates, as they are and have been based for many years on the analysis of 200 retail chains and traditional channels, like markets and trade pavilions, encompassing 120,000 points across the country. Clearly, the mass departure of Russians was a major factor in the decline in consumption.

For a normally functioning peacetime economy, this would be a serious blow.
"However, in Russia in 2022, the contraction in effective demand from households was offset by the sharp increase in demand from the state, which needed to provide for the warring army."
This situation cannot continue forever, though. Spending on the war might improve the GDP statistics, but it seriously undermines financial stability. Even if war spending is kept at the current level, at any moment it could blow up in an uncontrolled acceleration of inflation and/or a definitive loss of confidence in the Russian financial system on the part of business and the population.

Returning to those who left Russia, note that living in two countries is quite expensive. Whereas “relocation” was perceived as temporary at the beginning of the war, it has increasingly turned into full-fledged emigration as the war has dragged on. These people have begun to look for ways to legalize themselves in their new countries, change jobs and resolve housing problems. Thus, from a glass-half-full perspective, the loss of “human capital” that Auzan is talking about is not yet irreversible.

If the regime changed in Russia tomorrow, the vast majority of people who left after the start of the war or the mobilization would return. And they would remember the last year as either a nightmare or the biggest adventure of their lives. From a glass-half-empty perspective, however, with every week of the war, with every repressive law passed by the Duma, with every politically motivated prosecution, the number of people who have definitively made the decision to build a new life in another country grows. So far, the Russian economy has not felt even a fraction of the implications of losing so much human capital. But that’s just for now. Things are only getting worse.
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