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(Bloomberg) — Russia’s economy accelerated at the start of the year on the back of strong consumer demand, investment and exports, as the country continues to weather the impact of sanctions following the invasion of Ukraine.

Despite signs growth was slowing at the end of last year, the economy picked up in the early months of 2024, according to a Monday statement by the Bank of Russia summarizing its decision to hold rates at last month’s meeting.

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Rate-setters were particularly surprised by the resilience of consumers, supported by an increase in household incomes and borrowing, the minutes said. Savings among the population are also rising, bucking a tendency to decline at the start of the year.

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That coincides with investment growth and a stable financial position among the country’s biggest companies, according to the central bank. Based on a survey in March, the bank’s business climate indicator was the healthiest in the last 12 years. Future production and demand expectations are at their highest level since May 2013, the central bank said. 

Bank of Russia kept interest rates unchanged at 16% last month, seeking to navigate inflation risks that now include attacks on regions bordering Ukraine. The bank gave no guidance on the likely direction of its next move, saying “tight monetary conditions will be maintained in the economy for a long period.”

Read More: Russia Holds Rate as Attacks by Ukraine Spur Inflation Risks 

The central bank highlighted recent growth in commodity prices and exports, a key source of revenue for the Kremlin as it faces war expenses and social spending.

What Bloomberg Economics Says…

The statements show a strong labor market and consumption provide no pressure to cut its policy rate. Even with the policy rate unchanged at 16%, we estimate that Russia’s economy will start to cool in the coming months: rising debt-servicing costs will slow retail loan portfolio growth for banks, while the government’s phase out of the subsidized-rate mortgage program and tax hikes will slow corporate loan growth. We expect the Bank of Russia to deliver its first rate cut in June and reduce the policy rate to 13% by the end of 2024.

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-Alex Isakov, Russia economist

“The recent data indicates the Russian economy has been able to somewhat adapt to more complicated payments and logistics: exports are rebounding and so is foreign-exchange revenue,” the minutes said.

Russia, a top-three global oil producer, has faced several waves of western energy sanctions after it invaded Ukraine in 2022. Most recently, the US toughened its monitoring of the price caps on Russian crude oil and petroleum products, sanctioning a range of traders, shipowners and vessels involved in the transactions.

This has hit Russian oil-trading hard as India, a top buyer of Russian barrels, refused to purchase some cargo and declined to accept crude shipped by vessels associated with Russia’s Sovcomflot PJSC shipping company.

Still, recent industry data suggests Russia has been able to mitigate the effect of the US crackdown.

India remained a top buyer of Russian crude in March, with purchases jumping to the highest since November. Russia’s total seaborne crude exports in the four weeks to March 24 averaged 3.2 million barrels per day, compared to around 3.4 million barrels per day in the four-week period to Feb. 25, the ship-tracking data indicates.

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Several major Russian refineries have been attacked by Ukrainian drones as the war extends beyond the second anniversary of Moscow’s invasion. The strikes have caused a partial or complete halt of some facilities, and as a result, Russia’s weekly crude-processing rates through March 20 dropped to a 10-month low, raising concerns over fuel supplies to the domestic and external markets.

However, Russia will be able to mitigate negative effects of the drone attacks on its exports and revenue, according to the central bank.

“Lower petroleum-product exports due to refinery outages and the gasoline-export ban may to a large extent be replaced by higher crude oil exports,” the central bank said, reiterating earlier statements by Energy Ministry officials.

Despite many positive developments, Russia is still facing decreasing opportunities to attract foreign funding, the minutes said. That’s why the central bank decided that “maintaining tight monetary conditions will contribute to more balanced, controlled import dynamics.” 

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