Russian President Vladimir Putin meets with the head of the Federal Financial Supervisory Service (Rosfinmonitoring) Yury Chikhanchin at the Kremlin in Moscow, Russia, June 27, 2022.
Mikhail Metzel | Kremlin | Sputnik | via Reuters
Russia’s economy contracted in the second quarter, the first full three months since the country’s invasion of Ukraine, and economists are divided over whether it can continue to withstand the onslaught of long-term international sanctions.
The Russian economy shrank by 4% year-on-year in the second quarter, although it was less strong than the 5% expected by analysts. Russia’s Central Bank expects the decline to deepen in the coming quarters, reaching its lowest point in the first half of 2023.
It comes as Moscow struggles to recalibrate its economy in the face of a barrage of sanctions imposed by Western powers in response to the war, which have disrupted trade and nearly cut Russia out of the global financial system.
“There have been signs of stabilization in many sectors over the last month or two, but we don’t expect the downturn to bottom out until the second quarter of 2023 and we think the economy will stagnate at least after that,” Liam said Peach, Senior Emerging Markets Economist at Capital Economics.
The immediate impact of the sanctions was mitigated by swift action by the CBR to deploy capital control measures and sharply raise interest rates. The measures stabilized domestic markets and even saw the ruble become one of the world’s best-performing currencies so far this year.
Subsequently, fiscal stimulus measures and substantial interest rate cuts have also come into effect, reducing the short-term impact of the sanctions. Late last month, the central bank surprised by cutting Russia’s key rate by 150 basis points, bringing it to 8% and marking the fifth consecutive cut since it launched an emergency hike from the 9, 5% to 20% at the end of February.
“The fall could have been much deeper, but the central bank took immediate action to prevent a financial crisis from taking hold. It also appears that the resilience of Russia’s energy sector cushioned the impact of Western sanctions,” he added Peach.
However, many economists see the long-term damage to Russia’s economy as far more serious, as a flight of business and talent gradually compresses economic activity, along with a lack of access to critical technologies.
Meanwhile, the sanctions have hit some areas of the economy hard, with manufacturing output falling 4% quarter-on-quarter and output from import-dependent sectors falling more than 10%.
Consumer demand has also weakened significantly; retail sales fell 11% quarter-on-quarter after March’s brutal inflation shock, while consumer confidence sank and monetary conditions tightened.
“The third quarter is likely to be another weak quarter, albeit a smaller contraction than in the second quarter. Declines in retail sales and manufacturing have softened, inflation has eased and monetary conditions they’ve loosened up,” Peach said.
“However, the economy still faces strong headwinds, such as limited access to Western technology and an imminent ban on providing insurance for Russian oil shipments, which we believe will make production will fall by 10% next year.”
Capital Economics does not expect Russian GDP to bottom out for another year or so.
It sinks, it doesn’t drown
August 24 will mark six months since global sanctions were first imposed on Russia in response to its February 20 invasion of Ukraine. now there is more than 11,000 international sanctions in the country
While many economists focus on long-term structural threats to the Russian economy, which the government and central bank are struggling to counter, the more immediate collapse that some predict has not materialized.
“Despite the onslaught of sanctions and the predictions of many observers, Russia’s economy has not imploded, and while it faces a contraction of 5-6% this year, it is not in danger of collapsing or no kind of economic or financial crisis. crisis,” said Chris Weafer, CEO of Moscow-based Macro-Advisory.
“However, it faces 5-7 quarters of low single-digit declines and a long list of challenges that, if not effectively addressed, will keep growth near stagnation for many years” .
In a research note on Friday, Weafer suggested that the Russian economy is “failing, not drowning.”
Macro-Advisory estimates that the Russian state accounts for more than 60% of GDP, while small and medium-sized enterprises account for less than 25%. This imbalance restricts growth in normal times, but also isolates the economy in times of crisis, he added.
“Government, business and people are used to economic crises (this is the fifth since 1991) and the support structures, for entrepreneurs and in the social sphere, are well developed,” Weafer said.
Meanwhile, business confidence, after falling sharply in March and April, has returned to long-term averages for both manufacturing and services.
Weafer also disagreed with recent assessments that the economy is on a long road to “oblivion”, arguing that a mass exodus of Western companies from Russia would not be so damaging to activity as is widely assumed.
“Most of those exiting are small businesses (such as fashion retail) or have sold to local buyers. Of the 50 foreign-controlled companies, only three have closed completely,” he said.
“Another three have sold to local buyers and 10 more have said they plan to sell to a local buyer. The others are staying put. We estimate the impact on GDP at less than 1% because operating assets will remain in the country” .
This contrasts with the “catastrophic” success projected by a Yale University study published last month, which analyzed high-frequency data on consumption, trade and shipping. The authors of the study argue that sanctions and the exodus of more than 1,000 global companies are “crippling” the Russian economy.
But Weafer is far from convinced. “There is great skepticism about Russia’s so-called resilience and ability, even willingness, to invest in localization, especially given how little has been done in areas such as technology, engineering and services specialized during the last twenty years”. Weafer added.
“But as previous crises have shown, Russia usually addresses these issues when it has no other choice, and usually only then.”
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