Russia’s economy begins to crack as economists forecast sharp contractions

Russian President Vladimir Putin attends a meeting with members of the Security Council at a residence outside Moscow, Russia, on April 1, 2022.

Mikhail Klimentyev Sputnik | Reuters

Russia’s economy will shrink sharply this year, while inflation will soar, as punitive international sanctions in response to its unprovoked invasion of Ukraine begin to take effect.

Russian manufacturing activity in March contracted at its fastest pace since May 2020, in the early stages of the Covid-19 pandemic, as material shortages and delivery delays weighed heavily on factories.

The S&P Global Purchasing Managers’ Index (PMI) for Russia, released on Friday, fell from 48.6 in February to 44.1 in March, with anything below 50 representing a contraction. Goldman Sachs economists noted on Friday that the decline was “broad-based, with sharp declines in production, new orders and (especially) components of new export orders.”

In a note on Wednesday, economists at Capital Economics projected that Western sanctions are likely to push Russian gross domestic product into a 12% contraction in 2022, while inflation is expected to top 23% year-on-year.

The European Bank for Reconstruction and Development has projected a 10% contraction in the Russian economy, which would still constitute the country’s deepest recession in almost 30 years, with GDP stagnating in 2023 and entering a prolonged period of growth. insignificant.

Goldman Sachs also forecast a 10% contraction, while the Institute of International Finance think tank projected a more damaging 15% drop in Russian GDP in 2022 and another 3% in 2023.

However, fears of a Russian sovereign debt default have failed to materialize, as the Kremlin managed to pay a recently closely watched bond payment despite strings of sanctions from Western powers that have frozen large portions of the central bank’s foreign exchange reserves worth $640 billion. .

Russian stocks have also rose the most since its reopening on March 24 after a month-long shutdown of Moscow exchanges, along with the rublealthough the capital control measures adopted by the Central Bank of Russia and the decrease in the risk of debt default are partially responsible.

“A more sustained recovery will likely require a peace deal that still seems a long way off. In the meantime, the fallout from the war will be felt sharply in Central and Eastern Europe (CEE),” Capital’s chief emerging markets economist said in the report. Economics, William Jackson.

“Industry will be hit by supply disruptions and higher inflation will weigh on real household incomes and reduce consumer spending. We expect the war to shave 1.0 to 1.5 percentage points off growth in the EEC this year.

The outlook for Russia may darken further after reports of massacres of civilians by Russian forces in Bucha and other Ukrainian cities emerged over the weekend. The alleged atrocities will set back expectations for peace talks and heighten the threat of more punitive international sanctions.

Ukraine’s top prosecutor said Sunday that 410 bodies they had been found in towns recaptured from retreating Russian forces around kyiv as part of an investigation into possible war crimes while Ukrainian President Volodymyr Zelenskyy accused Russia of genocide. Russia has denied allegations that its forces killed civilians in Bucha, 23 miles northwest of kyiv.

The European Union plans to introduce new sanctions against Moscow in the wake of the new reported atrocities, with European Council President Charles Michel announcing on Twitter that “more EU sanctions and support are on the way”.

British Foreign Secretary Liz Truss is due to travel to Poland on Monday to meet her Ukrainian and Polish counterparts ahead of talks with G7 and NATO allies later this week, and is expected to call for stronger sanctions. harsh against Russia.

Despite sharp declines in Russia’s March PMIs, Goldman Sachs noted on Friday that activity in some CEEMEA economies was surprisingly strong, with gains in Hungary and South Africa offset by declines in Poland and the Czech Republic.

“Hungary’s PMI has been relatively volatile in recent months, so we would play down the significance of its gain (especially since our analysis suggests it is relatively exposed to the conflict between Russia and Ukraine),” the Goldman economists wrote.

“For South Africa, its direct trade with Russia and Ukraine is limited, while it benefits from higher commodity prices.”

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