Russia faces “economic oblivion” despite short-term resilience

Russian President Vladimir Putin attends a meeting with parliamentary leaders in Moscow, Russia on July 7, 2022.

Aleksey Nikolskyi | Sputnik | Reuters

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

Last week the International Monetary Fund updated Russia’s gross domestic product estimate for 2022 by 2.5 percentage points, which means the economy is now expected to contract 6% this year. The IMF said the economy appeared to be resisting the barrage of economic sanctions better than expected.

The Russian central bank surprised markets in late July by cutting its benchmark interest rate to 8%, below the pre-war level, citing falling inflation, a strong currency and the risk of recession.

The ruble has recovered from initial historical losses in the aftermath of the invasion of Ukraine to become a top performer on 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 raw materials, 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 oil and gas markets for a long time. term and reduced access to critical imports of technology and inputs.

Ian Bremmer, president of Eurasia Group, told CNBC on Monday that while short-term sanctions disruptions are lower than initially anticipated, the real debate extends beyond 2022.

“Anecdotal evidence suggests that manufacturing dislocations are increasing as inventories run out and the shortage of foreign parts becomes constraining. Chip and transportation are among the sectors cited, in some cases reflecting military dual-use demand,” he said. Bremmer.

“Government arrears could contribute to wider shortages. Imports of consumer goods are on the rise, but fewer intermediate / investment goods.”

Bremmer stressed that as sanctions intensify and popular discontent grows, educated people are leaving Russia, stressing the importance of trade sanctions on sensitive technologies and the “longer deadline for sanctions to undermine productivity and growth of the trend “.

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

“It affects overall productivity by reducing innovation and affects general confidence in the economy by reducing investment and savings.”

Eurasia Group expects a sustained and long-term decline in economic activity that will ultimately result in a 30-50% contraction of Russian GDP from the pre-war level.

‘Catastrophically paralyzing’

A Yale University study released last month, which analyzed high-frequency data from consumption, trade, and shipping that its author’s claim presents a truer picture than the one presented by the Kremlin, said rumors about Russia’s economic survival had been greatly exaggerated.

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

“Russia’s strategic positioning as a commodity exporter has irrevocably deteriorated as it now faces the loss of its former core markets from a position of weakness and faces tough challenges by pivoting to Asia with non-fungible exports. as pipelines, “Yale economists said.

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

“Despite Putin’s delusions about self-sufficiency and import substitution, Russian domestic production has come to a complete halt with no capacity to replace lost businesses, products and talent; the depletion of Russia’s internal innovation and manufacturing base has led to rising prices and consumption anguish, “the report reads.

“As a result of the business withdrawal, Russia has lost companies accounting for around 40% of its GDP, reversing nearly all three decades of foreign investment and reinforcing the unprecedented simultaneous flight of capital and population in a mass exodus of the base. Russian economy “.

No way out of “economic oblivion”

The apparent resilience of the Russian economy and the ruble’s resurgence has been largely attributed to soaring energy prices and tight capital control measures – implemented by the Kremlin to limit the amount of foreign currency leaving the country – together with the sanctions that limit their import capacity.

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

Russia has now loosened some of its capital controls and cut interest rates in an effort to lower the currency and bolster its fiscal account.

“Putin is resorting to a blatantly unsustainable and dramatic fiscal and monetary intervention to smooth out these structural economic weaknesses, which has already deficit his government budget for the first time in years and has drained his foreign reserves even with high prices. energy – and the Kremlin’s finances are in much, much worse shape than is conventionally thought, “Yale economists said.

They also noted that Russia’s domestic financial markets have been 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 liquidity economy. and credit crunch “, along with the effective ostracization of Russia from international financial markets.

“Looking ahead, there is no way out of economic oblivion for Russia as long as the allied countries remain united in maintaining and increasing the pressure of sanctions against Russia,” the report concludes.

“The defeatist headlines claiming that the Russian economy has recovered are simply not real: the facts are that, by any measure and at any level, the Russian economy is faltering and now is not the time to slow down.”

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