- Russia’s economy is on track to contract 15% in 2022 according to some estimates, as the war in Ukraine and Western sanctions put heavy pressure on the country.
- The country is virtually excluded from global finance and imports and exports are expected to plummet, while inflation is set to skyrocket.
- Putin’s war is likely to end 15 years of growth and plunge Russians into economic chaos not seen since the 1990s.
Russia’s economy nearly imploded in the 1990s. It shrank by 7% a year on average for seven years in a row.
The experience lives on in the minds of the Russians who lived through it. Indeed, President Vladimir Putin has historically framed himself as Russia’s savior, providing a stable economy and restoring national pride.
Now, however, Putin’s brutal war in the Ukraine will end 15 years of growth and send the Russian economy back to the dark days that followed the fall of the Soviet Union.
The sanctions of the United States and its allies have cut off Russia’s access to the global financial system, with the private central bank holding just under half of its $640 billion global foreign exchange reserves reserve.
Russia’s economy will shrink sharply
The Institute of International Finance think tank calculates that Russia’s gross domestic product, the most common measure of an economy’s size, will plummet by a disastrous 15% in 2022. Along with a 3% decline in 2023, it will wipe out 15 years of growth. , create the IIF.
Goldman Sachs believes that the economy shrink 10% this year, having previously expected it to grow 2%. Capital Economics forecasts a 12% contraction.
“The shock in Russia will come from almost every sector,” Liam Peach, emerging markets economist at Capital Economics, told Insider. The consultancy expects unemployment to rise from 4.1% to 8% by the end of 2022.
Peach said that the decision by Western governments to cut certain Russian banks out of fast, a crucial global payment messaging system, will hit non-energy exports hard. Meanwhile, the US has banned the import of Russian oil and the UK is doing the same.
Goldman Sachs believes that sanctions and self-sanctioning by Western companies will cause imports to fall 20% this year and exports to fall 10%.
Inflation will skyrocket to 20%
Western governments are panicking at high inflation rates of between 5% and 8%. But Russians are likely to face inflation of 20% or more by the end of the year, according to economists.
A weaker ruble will push up the price of imports, while sanctions and the withdrawal of Western companies are likely to sharply reduce the supply of goods and services.
“The supply-side shock is going to be absolutely horrible,” Madina Khrustaleva, a Russia analyst at consultancy TS Lombard, told Insider.
The central bank has interest rates rose to 20% to try to curb withdrawals from Russian banks. But punitive interest rates are set to cause a sharp drop in borrowing and investment.
Khrustaleva said that the rapid withdrawal of foreign investment and companies is likely to bring about major changes in the economy. The government will play a much larger role and the production of raw materials will be even more important. She said it would be like the 1990s in reverse.
“In the 1990s, we understood that this structural change will lead to this increase in productivity,” Khrustaleva said. “Now, you have the ’90s but going backwards. It’s a tremendous loss of productivity.”
Raw materials and the rise of the ruble can ease the pain
The only ray of hope for Russia is that its brutal war in the Ukraine has raised world commodity prices considerably. Russia is the world’s third largest oil producer and supplies Europe with a third of its natural gas.
Goldman economists believe that Russia should still have a large trade surplus in 2022, which would bring foreign currency into the country and ease some of the pain in the financial system.
Meanwhile, the ruble has risen sharply in recent days as peace talks intensify. Investors hope that the end of the war could see Russia, at least partially, reintegrated into the world economy.
But things could also get worse. Capital Economics’ Peach said an EU move to restrict energy imports would have a big impact and could trigger “a wave of corporate defaults.”
The outlook is grim, but very uncertain. The Russian economy is, more than ever, in the hands of Putin.