Russia facing “economic oblivion” despite its short-term resilience

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

The International Monetary Fund last week raised Russia’s gross domestic product estimate for 2022 by 2.5 percentage points, meaning the economy is now expected 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 surprised the markets at the end of July by reducing its key rate to 8%, below its pre-war level, citing slowing inflation, a strong currency and the risk of recession.

The ruble has recovered from its first historic losses in the aftermath of Ukraine’s invasion to become one of the best performers in the global currency market this year, prompting Russian President Vladimir Putin to declare that Western sanctions had failed.

Meanwhile, Russia continued to export energy and other raw materials while taking advantage of Europe’s dependence on its gas supplies.

However, many economists see the long-term costs to Russia’s economy of the exit of foreign companies – which will affect productive capacity and capital and lead to a “brain drain” – as well as the loss of its oil and long-term gas resources and reduced access to essential imports of technology and inputs.

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

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

“Government arrears may contribute to wider shortages. Imports of consumer goods increase, but less intermediate/investment goods.”

Bremmer pointed out that as sanctions escalate and popular discontent grows, educated people are leaving Russia, emphasizing the importance of trade sanctions on sensitive technologies and the “longer time frame in which sanctions undermine the productivity and growth”.

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

“This affects overall productivity, reduces 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 in Russian GDP from its pre-war level.

‘Catastrophically crippling’

A Yale University study released last month that analyzed high-frequency consumer, trade and shipping data, which its author claims presents a truer picture than the Kremlin , argued that 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 crippling” the Russian economy.

“Russia’s strategic positioning as a commodity exporter has irrevocably deteriorated, as it now deals with a position of weakness with the loss of its once major markets, and faces daunting challenges to execute a ‘pivot to Asia’ with non-fungible exports such as piped gas,” the Yale economists said.

They added that despite some “persistent leaks”, Russian imports have “largely collapsed”, with Moscow now facing difficulties obtaining inputs, parts and technology from increasingly nervous trading partners and, by result in widespread supply shortages in its national economy.

“Despite Putin’s illusions of self-sufficiency and import substitution, Russian domestic production has come to a complete halt, with no ability to replace lost companies, products and talents; the depletion of the innovation and Russia’s domestic production has led to soaring prices and consumer angst,” the report said.

“As a result of the business slump, Russia has lost businesses representing around 40% of its GDP, reversing almost all of three decades of foreign investment and reinforcing the unprecedented simultaneous flight of capital and population into a mass exodus from Russia’s economic base.

No way out of “economic oblivion”

The apparent resilience of the Russian economy and the resurgence of the ruble has been widely attributed to soaring energy prices and strict capital control measures – implemented by the Kremlin to limit the amount of foreign currency leaving the country – as well as sanctions limiting its ability to import.

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

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

“Putin is resorting to blatantly unsustainable and dramatic fiscal and monetary intervention to mitigate these structural economic weaknesses, which have already sent his public budget into deficit for the first time in years and depleted his foreign exchange reserves even with high oil prices. energy – and the Kremlin’s finances are in far more dire straits than is usually thought,” 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 “sustained and persistent weakness in the economy with liquidity and credit”, as well as the effective ostracism of Russia. international financial markets.

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

“The defeatist headlines claiming that the Russian economy has rebounded are simply not factual – the facts are that, in every respect and on every level, the Russian economy is in shock, and that is not the time to brake.”