Aleksey Nikolsky | Sputnik | Reuters Russia faces “economic oblivion” in the long term due to international sanctions and business flight, several economists said. The International Monetary Fund last week upgraded its estimate of Russia’s gross domestic product for 2022 by 2.5 percentage points, meaning the economy is now projected to contract by 6% this year. The IMF said the economy appears to be weathering the barrage of economic sanctions better than expected. Russia’s central bank surprised markets in late July by cutting its key interest rate to 8%, below the pre-war level, citing cooling inflation, a strong currency and the risk of a recession. The ruble rebounded from historic early losses after the invasion of Ukraine to become the top performer in the global currency market this year, prompting Russian President Vladimir Putin to declare that Western sanctions had failed. Meanwhile, Russia has continued to export energy and other commodities while tapping into Europe’s reliance on natural gas supplies. But many economists see long-term costs to the Russian economy from the exit of foreign companies – which will hurt productivity and capital and lead to a “brain drain” – along with the loss of long-term oil and gas markets and reduced access to critical technology and input imports. Ian Bremmer, president of Eurasia Group, told CNBC on Monday that while short-term sanctions relief is less than initially expected, the real talk goes beyond 2022. “Anecdotal evidence suggests manufacturing shifts are increasing as inventories run out and foreign parts shortages become binding. Chips and transport are among the sectors cited, in some cases reflecting dual-use military demand,” Bremer said. “Government arrears may be contributing to wider shortfalls. Imports of consumer goods are up, but less of intermediate/investment goods.” Bremer stressed that as sanctions tighten and popular discontent grows, educated people are leaving Russia, underscoring the importance of trade sanctions on sensitive technologies and the “longer timescale over which sanctions undermine productivity and trend growth.” “Brain drain leads to an immediate reduction in the working-age population, particularly highly productive workers, reducing GDP,” he said. “It affects overall productivity, reducing innovation, and affects overall confidence in the economy, reducing investment and savings.” The Eurasia Group predicts a sustained, long-term decline in economic activity that will eventually lead to a 30-50% contraction of Russian GDP relative to its pre-war level.
“catastrophically disabled”
A Yale University study published last month, which analyzed high-frequency consumer, trade and shipping data that the author claims presents a truer picture than the Kremlin’s, argued that rumors of Russia’s economic survival were very exaggerated. The paper suggested that international sanctions and the exit of more than 1,000 global companies are “catastrophically crippling” the Russian economy. “Russia’s strategic position as a commodity exporter has been irreversibly deteriorated, as it now faces from a position of weakness the loss of its old core markets and faces intense challenges in making a ‘pivot to Asia’ with non-tradable exports such as natural gas,” the Yale economists said. They added that despite the “prolonged leakage”, Russian imports have “largely collapsed”, with Moscow now facing challenges securing inputs, parts and technology from increasingly nervous trading partners and seeing widespread supply shortages as a result. in its domestic economy. “Despite Putin’s delusions of self-sufficiency and import substitution, Russian domestic production has ground to a halt without the ability to replace lost businesses, products and talent; the elimination of Russia’s domestic innovation and manufacturing base has sent prices and consumers soaring . agony,” the report said. “As a result of the business downturn, Russia has lost companies representing about 40% of its GDP, reversing nearly three decades of foreign investment and supporting an unprecedented simultaneous flight of capital and population in a mass exodus from the Russian economic base.”
No way out of ‘financial oblivion’
The apparent resilience of the Russian economy and the resurgence of the ruble has been largely attributed to surging energy prices and strict capital controls – implemented by the Kremlin to limit the amount of foreign currency leaving the country – along with sanctions that limit its ability to import. Russia is the world’s largest exporter of natural gas and the second largest exporter of oil, so the GDP hit from the war and related sanctions has been cushioned by high commodity prices and Europe’s continued dependence on Russian energy currently. Russia has now relaxed some of its capital controls and cut interest rates in a bid to lower the currency and shore up its fiscal account. “Putin is resorting to apparently unsustainable, dramatic fiscal and monetary intervention to smooth out these structural economic weaknesses, which have already pushed his state budget into deficit for the first time in years and are depleting his foreign exchange reserves even with high energy prices – and the Kremlin’s finances are in much, much worse shape than conventionally understood,” the Yale economists said. They also noted that Russia’s domestic financial markets were the worst-performing in the world so far this year, despite tight capital controls, with investors pricing the economy’s “continued, persistent weakness in liquidity and credit”, along with effective exclusion of Russia from the international financial markets. “Looking ahead, there is no path out of economic oblivion for Russia as long as allied countries remain united in maintaining and increasing sanctions pressure against Russia,” the report concludes. “The defeatist headlines that claim Russia’s economy has recovered are simply not substantiated – the facts are that, by any measure and at any level, the Russian economy is faltering and now is not the time to slam on the brakes.”
