Russia faces ‘economic oblivion’ despite short-term resilience

Russia faces long-term “economic oblivion” due to international sanctions and business flight, several economists have said.

The International Monetary Fund last week improved its estimate of Russia’s gross domestic product for 2022 by 2.5 percentage points, meaning the economy is now forecast to contract 6% this year. The IMF said the economy appeared to be weathering the barrage of economic sanctions better than expected.

the Central Bank of Russia It surprised markets in late July by cutting its key interest rate again to 8%, below its prewar level, citing cooling inflation, a strong currency and recession risk.

the ruble recovered from historic early losses after the invasion of Ukraine to become one of the best in the world forex 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 taking advantage of Europe’s dependence on its gas supplies.

However, many economists see lasting costs to the Russian economy from the exit of foreign companies, which will affect production capacity and capital and result in a “brain drain”, along with the loss of its markets of long-term oil and gas and less access to critical imports of technology and inputs.

Ian Bremmer, chairman of the Eurasia Group, told CNBC on Monday that while the short-term breaks from sanctions are smaller than originally anticipated, the real debate goes beyond 2022.

“Anecdotal evidence suggests that manufacturing dislocations are increasing as inventories run low and foreign parts shortages become binding. Chips and transportation are among the sectors cited, in some cases reflecting military demand for dual use,” Bremmer said.

“Government arrears may be contributing to broader shortages. Imports of consumer goods are increasing, but fewer intermediate/investment goods.”

Bremmer noted that as sanctions intensify and popular discontent grows, the educated are leaving Russia, stressing the importance of trade sanctions on sensitive technologies and the “longer time frame in which sanctions undermine productivity and trend growth.” “.

“The brain drain leads to a direct decline in the working-age population, especially high-productivity workers, which reduces GDP,” he said.

“It affects overall productivity, it reduces innovation, and it affects overall confidence in the economy, reducing investment and saving.”

Eurasia Group projects a long-term, sustained decline in economic activity eventually resulting in a 30-50% contraction in Russian GDP from its pre-war level.

‘Catastrophically crippling’

A Yale University study published last month, which analyzed high-frequency consumer, trade and shipping data that its author’s claim paints a truer picture than the one presented by the Kremlin, argued that rumors of survival Russia’s economic economy had been greatly exaggerated.

The document suggested that international sanctions and the exodus of more than 1,000 global companies are “catastrophically crippling” the Russian economy.

“Russia’s strategic positioning as a commodity exporter has irrevocably deteriorated as it now grapples from a position of weakness with the loss of its former major markets and faces major challenges in executing a ‘pivot to Asia’ with non-expendable exports such as the piped gas.” said the Yale economists.

They added that despite some “persistent leaks”, Russian imports have “largely collapsed”, with Moscow now facing challenges in securing supplies, parts and technology from increasingly nervous trading partners and seeing shortages as a result. widespread supply in its national economy.

“Despite Putin’s illusions about self-sufficiency and import substitution, Russian domestic production has come to a complete standstill with no ability to replace lost companies, products and talent; the hollowing out of domestic innovation and the Russian production has led to sky-high prices and consumption. distress,” the report says.

“As a result of corporate withdrawal, Russia has lost businesses representing ~40% of its GDP, reversing almost all of three decades of foreign investment and underpinning an unprecedented simultaneous flight of capital and population in a mass exodus from the base.” economy of Russia.

There is no way out of ‘economic oblivion’

The apparent resilience of the Russian economy and the resurgence of the ruble was largely attributed to rising energy prices and strict capital control measures put in place by the Kremlin to limit the amount of foreign exchange leaving the country, along with the sanctions that restricted their ability to import.

Russia is the world’s largest gas exporter and the world’s second largest oil exporter, and thus the blow to GDP from the war and associated sanctions has been softened by high commodity prices and Europe’s continued reliance on Russian energy for the time being.

Russia has now relaxed some of its capital controls and cut interest rates in a bid to bring down the currency and shore up its fiscal account.

“Putin is resorting to patently unsustainable and dramatic fiscal and monetary intervention to smooth out these structural economic weaknesses, which has already caused his government to run a budget deficit for the first time in years and deplete its foreign exchange reserves even with the high energy prices, and the finances of the Kremlin”. are in a much more dire situation than is conventionally understood,” the Yale economists said.

They also noted that Russia’s domestic financial markets were the worst performing markets in the world so far this year despite tight capital controls, with investors pricing in “sustained and persistent weakness within the economy with liquidity and credit contracting,” along with the effective ostracism of Russia. of the international financial markets.

“Looking ahead, there is no way out of economic oblivion for Russia as long as allied countries remain united to maintain and increase sanctions pressure against Russia,” the report concluded.

“The defeatist headlines that argue that Russia’s economy has recovered are simply not factual: the facts are that, by any measure and at any level, the Russian economy is faltering and now is not the time to hit the brakes.”