Russia’s economy may face several long-term challenges, but energy exports currently appear to be helping it weather Western sanctions imposed over the offensive against Ukraine.

Moscow says inflation is easing and employment is virtually full, contradicting many financial experts’ predictions of a disaster.

The International Monetary Fund somewhat supported Russia’s view on Tuesday, saying the recession will be less severe than expected on oil exports and relatively resilient domestic demand.

The IMF forecast that Russia’s economy will contract by just 3.4 percent for the full year, after contracting at a quarterly projected rate of 21.8 percent in the second quarter.

Only in June did the IMF forecast an annual minus of six percent.

“The contraction in Russia’s economy is less severe than previously forecast, reflecting the resilience of crude oil exports and domestic demand with greater fiscal and monetary policy support and a restoration of confidence in the financial system,” the IMF’s latest World Economic Outlook report said .

President Vladimir Putin said in September that the country’s economy was “normalizing” and that the worst was over after a series of economic sanctions following the military operation launched against Ukraine in February.

Unemployment has fallen to an all-time low of 3.8 percent, Putin said, with annual inflation at 13.7 percent a year, after record highs in the spring when early sanctions began to take hold.

“We can assume that the effects of the first sanctions are over, especially in the financial sector,” Elina Ribakova, deputy head of the Institute of International Finance, a trade group for the global financial services industry, told AFP.

The diplomatic and economic break with the West accelerated Moscow’s rapprochement with energy-hungry China, with which it shares a 4,000-kilometer border.

Almost locked out of the European market, “Russian companies have been forced to find alternatives in other markets, particularly in Asia and Turkey,” Moscow State University economist Natalya Zubarevich told AFP.

Russia and China have already announced their intention to sign gas and electricity contracts in rubles and yuan, a triumph for the Kremlin’s efforts to take the US dollar out of the economy.

Last week’s decision by the OPEC+ oil cartel to cut production again despite Washington’s calls to open the taps was also warmly welcomed by Moscow, which is benefiting from rising crude prices.

As the G7 club of rich nations struggle to agree on a ceiling price for Russian oil, China and India seem reluctant to impose a cap that actually appears to improve Russia’s prospects.

And for 2023, the IMF now expects Russia’s economy to contract by 2.3 percent, an improvement from the 3.5 percent it forecast in July.

However, the Russian economy is increasingly dependent on energy exports and continues to lag behind in many high-value sectors.

The promise that Russia will develop its own high-tech products after importing them from abroad has yet to be fulfilled, and it lacks domestic rivals from tech giants like Apple and Microsoft.

Companies that depend on top-quality foreign products have to face their isolation from international markets.

A blatant shortage of spare parts has also hit car production.

The Japanese manufacturer Toyota closed its plant in Saint Petersburg in mid-September due to a shortage of electronic components.

Nissan is selling its Russian assets, including a factory in the city, to the Russian government after production stopped in March.

“About half of the companies affected by sanctions are still struggling to find alternative suppliers,” Ribakova said.

As a result, the government has relaxed safety and environmental standards for domestically built vehicles.

In a leaked document released recently in local media, officials at the Ministry of Trade and Industry rang alarm bells about a 10-15 year gap for Russia’s tech industry, reliance on foreign goods and a shortage of workers.

A looming concern for Moscow is the European embargo on Russian oil, due to begin December 5, before a ban on refined oil products from February next year.

In the first eight months of this year, more than 40 percent of federal revenue came from oil and gas, according to the Treasury Department.