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Black box economics: Russia’s internal struggle over classified financial data

Russian politicians are debating whether more data should be declassified as the Kremlin’s desire for secrecy makes it hard for even seasoned observers to make sense of the country’s economy.

Elvira Nabiullina, the governor of Russia’s central bank, is leading efforts to reverse much of the decision to classify a plethora of economic data made in the early weeks of last year’s full-scale invasion of Ukraine, according to three people familiar with the matter. .

The Kremlin, which has yet to approve the initiative, justifies the withholding of information on a wide range of economic statistics as a necessary defense against Western sanctions. Secret datasets include important indicators such as foreign exchange reserves and export data. Russian companies are allowed to keep “confidential” results secret.

Last month, Nabiullina said the country needed to disclose more data for markets to grow. “We need to get back to proper disclosure, with a few exceptions, so that investors can invest in securities,” she said.

The debate highlights the extent to which economic data has become part of the Russian information war accompanying Vladimir Putin’s offensive in Ukraine and the West’s efforts to slow it down.

Addressing his economic cabinet on January 17, the Russian president proudly declared that Russia had weathered the worst of the sanctions.

“The real dynamics turned out to be better than many experts’ forecasts,” Putin said. “Remember, some of our experts here in the country – I’m not even talking about Western experts – thought [gross domestic product] fall by 10, 15, even 20 percent.”

Russian President Vladimir Putin held a meeting on economic issues via video link

Vladimir Putin: “The real dynamics turned out to be better than many experts’ forecasts” © Sputnik/Mikhail Klimentyev/Kremlin/Reuters

Analysts agree that Russia’s economy has fared better than expected, but Putin’s rush to classify most economic data has left them with little more than his triumphant pronouncements and even tripped up the Russian president himself.

Classified budget spending increased by more than 40 percent to $95 billion from a pre-war plan of $54 billion. Russia’s foreign trade data has completely disappeared.

The uncertainty of Russia’s data has so confused the economic picture that the country’s ability to weather the sanctions surprised even politicians with access to classified data, according to three people familiar with the matter.

“The lack of transparency in statistics creates problems even for those inside the system,” said a senior official at the Russian central bank. “The economic wing has access to hidden macro data, but corporate statistics are sometimes a problem.”

Even technically correct numbers can mask broader issues. Putin said last week that Russia had “maintained stability” in the labor market and had reached a record low unemployment rate of below 4%.

What Putin didn’t mention, however, is that hundreds of thousands of workers have fled the country since the invasion began, and 300,000 drafted into the army are now considered employed. According to Andrei Kolesnikov, senior fellow at the Carnegie Endowment for International Peace, this may improve performance, but it will not improve the labor market.

Hidden unemployment, including simple, unpaid leave and part-time employment, reached a record 4.66 million people in the third quarter of 2022, an increase of 7.5% year on year, analysts from the FinExpertiza consulting network write.

Bar chart of official and hidden unemployment in Russia (%) showing that hidden unemployment in Russia is at an all-time high

To find missing data, foreign and domestic analysts resort to creative ways of cross-checking. “We have started using alternative indicators to track the dynamics of exports and imports: fiscal data on VAT on imports, trade statistics of Russia’s external counterparties, shipping data,” said Sofya Donets, chief economist for Russia at Renaissance Capital Moscow-based investment bank.

But not everything can be recovered. “Lack of disclosure by public companies and banks is a bigger problem.”

The Kremlin said that due to Western sanctions, it is necessary to limit public disclosure of information.

“A hybrid war is being waged against Russia, including an economic one. So under these conditions, it is quite natural that we classify this data, ”said Dmitry Peskov, Putin’s press secretary. “Everyone who needs to know, everyone involved in the economic policy making process has access to the full range of data, statistics and so on.”

Putin’s strict social distancing policy during the Covid-19 pandemic and his increasingly obsessive focus on perceived security threats have left him dependent on a shrinking circle of hawkish advisers and kept his economic team at arm’s length, two former senior officials said.

“All these guys tell him what he wants to hear. That is why he makes bad decisions,” said the former senior official. “Everyone lies to him.”

According to his spokesman, Putin regularly receives reports on the economy from his top officials. “Any claims that he is receiving distorted information are incorrect. He has all the information, he has meetings of the economic cabinet almost every week,” Peskov said.

Medical workers with a Covid patient in 2020
Vladimir Putin used official data to claim that Russia has beaten the pandemic and returned to economic growth before the West © AP

Long-standing doubts about the quality of Russian statistics were first heightened in 2020, when excess death rates were several times higher than the official coronavirus death toll. But Putin has used official data to claim that the country has beaten the pandemic and returned to economic growth ahead of the West.

The war in Ukraine only exacerbated the problem. When the invasion began, the Russian state statistical agency Rosstat stopped providing mortality statistics by age group upon request, which would allow researchers to make similar estimates of casualties using the methods they used to determine the likely real impact of the pandemic.

Experts say the discrepancy between publicly available data and the real economic picture is less stark, allowing broader trends to be reflected.

A worker watches a gas well in the Lensky district of the Republic of Sakha, Russia.
Vladimir Putin acknowledged that gas production had indeed fallen by 12% © Andrey Rudakov/Bloomberg

In September, Putin publicly reprimanded a senior energy official for suggesting that gas production at Gazprom, the Russian state monopoly, had begun to decline. “Gazprom’s production is not falling. You just scare everyone. It is growing,” the Russian president told Deputy Prime Minister Alexander Novak, even though Gazprom’s own statistics show a year-on-year drop of almost 15%.

By the January cabinet meeting, Putin admitted that gas production had indeed fallen by 12 percent, a figure that was in line with what Novak said in an interview in late December. But in separate comments just three days earlier, Novak had reported an 18% to 20% drop in production — and offered no reason for the sudden revision.

At a January meeting, Putin said Russia’s GDP had fallen by only 2.5 percent, a far cry from the 30 percent drop his top technocrats had warned about in a secret presentation a month before the war. The forecasts of international organizations are not far off: the IMF, the World Bank and the OECD estimate the decline in Russia’s GDP in 2022 in the range of 3.4% to 4.5% of GDP.

Much of the blow to Russia’s GDP has been cushioned by increased military spending, which analysts say has no effect on the real economy. “Tanks, missiles and uniforms have a positive effect on GDP. But where are they? They rot in Ukrainian fields,” said Vladimir Milov, a former deputy energy minister who now opposes the Kremlin from exile.

Bar chart of real wages (annual quarterly change in %) showing the change in real wages of Russians after the revision

Other inconsistencies interfere with the few available statistics. According to a study by the Institute of International Finance, in recent years, the dynamics of real wages has ceased to depend on retail sales. In 2022, real wages fell by 2-4%, mainly due to social payments, including to soldiers fighting in Ukraine. But retail turnover fell 9%, according to Infoline forecasts based on official statistics, likely indicating a bigger hit to consumers.

“It cannot be that people receive almost as much as they are used to, but for some reason spend much less,” Milov said.

Some experts also point to frequent retrospective revisions of statistics in Russia, such as adding dachas, Russian country houses, builders. “These are small changes. . . which do not change big trends, but always work to improve performance,” says Natalya Zubarevich, an economist at Moscow State University.

Given the lack of transparency in the Kremlin’s decision-making, one senior official expressed skepticism that the secrecy policy would be lifted anytime soon: “We are in talks and we hope they will listen to us, but we can’t be sure it will work.”

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