Russia’s economy contracted sharply in the second quarter as the country bore the brunt of the economic fallout from its war in Ukraine, in what experts believe is the start of a years-long recession.
The economy shrank by 4 percent from April to June compared with a year earlier, Russia’s statistics agency said on Friday. It is the first quarterly gross domestic product report to fully capture the change in the economy since the invasion of Ukraine in February. It was a strong reversal from the first quarter, when the economy grew by 3.5 percent.
The Western sanctions, which cut Russia off about half of its $600 billion emergency foreign exchange and gold reserves, imposed severe restrictions on business with Russian banks and cut off access to American technology, which caused hundreds of large Western corporations to withdraw from the country. .
But even as imports into Russia dried up and financial transactions froze, forcing the country to default on its foreign debt, the Russian economy proved more resilient than some economists had initially expected, and the GDP decline reported on Friday was not as severe as some had expected in part because the country’s coffers were flush with energy revenues as world prices rose.
Analysts, however, say the economic toll will increase as Western nations increasingly distance themselves from Russian oil and gas, critical sources of export revenue.
“We thought it would be a deep dive this year and then match it,” Laura Solanko, senior adviser at the Bank of Finland’s Institute for Transitional Economies, said of the Russian economy. Instead, there has been a milder economic downturn, but it will continue next year, putting the economy in a shallower recession for two years, he said.
Russia, a $1.5 trillion economy before the start of the war, moved quickly in the days after the invasion to mitigate the impact of the sanctions. The central bank more than doubled interest rates to 20 percent, severely restricted the flow of money out of the country, closed stock trading on the Moscow Stock Exchange, and loosened bank regulations so that loans were not taken advantage of. The government also increased social spending to support households and loans for businesses hit by the sanctions.
The measures reduced some of the impact of the sanctions. And as the ruble recovered, Russia’s finances benefited from high oil prices.
“Russia endured the shock of the initial sanction” and “so far it has been relatively resilient,” said Dmitry Dolgin, the chief economist who covers Russia at Dutch bank ING. But, he noted, unless Russia succeeds in diversifying its trade and finances, the economy will be weaker in the long term.
Retail trade declined by about 10 percent, the statistics agency said, while wholesale business activity fell by 15 percent.
Michael S. Bernstam, a researcher at Stanford University’s Hoover Institution, said the data released Friday was in line with other reports from Russia. He also expects the economy to deteriorate in the second half of this year, and again in 2023.
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As the war drags on, many countries and companies will seek to permanently end relations with Russia and its domestic companies. Companies will have trouble getting spare parts for Western-made machines, and software will need updates. Russian companies will have to reorganize their supply chains as imports pile up.
The outlook for Russia’s energy industry, central to the country’s economy, is deteriorating. The US and UK have already banned imports of Russian oil, and the country’s oil production is set to fall further early next year when the full impact of the EU’s import ban comes into effect European According to the International Energy Agency, Russia should find customers for about 2.3 million barrels of crude oil and petroleum products per day, which is about 20 percent of its average production in 2022.
So far, countries such as India, China and Turkey have absorbed some of the lost trade from Europe and the United States, but it is unclear how many new buyers may be found.
Dependence on Russian natural gas is also reduced. In the last week of June, total EU gas imports from Russia fell 65 percent from a year earlier, according to a report from the European Central Bank. Some of these declines were forced on Europe because Russia has been reducing its gas supply. But European countries have stepped up efforts to find alternative sources and, for example, are rapidly developing infrastructure for additional imports of liquefied natural gas.
The economy will suffer as “the depletion of investment import inventories, the implementation of the EU oil embargo, increased financial pressure on households and their increased reliance on ‘state’ take their toll, while the ability of the central bank and government to provide money and fiscal support is limited, Mr wrote. Dolgin from ING.
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Shortly after the invasion of Ukraine, inflation in Russia soared as households sought goods they expected to be in short supply. In July, inflation was higher than 15 percent, according to the Russian central bank. However, there are already signs that inflation is slowing and as a result the central bank has cut interest rates to 8 percent, lower than they were before the war.
Last month, the bank said business activity had not slowed as much as expected, but that the economic environment “remains challenging and continues to significantly constrain economic activity.”
The bank forecast that the economy will shrink by 4 to 6 percent this year, far less than initially expected just after the war began. This figure of 6 percent also matches the last one update of the International Monetary Fund.
The economy will experience a deeper contraction next year and will not return to growth until 2025, the central bank said on Friday. The bank predicted that inflation would be 12% to 15% by the end of the year.
In the coming months, supply chain issues will present challenges as companies constrained by sanctions try to disrupt their supply chains to replenish inventories of finished and raw goods.
“I don’t think the Russian economy is doing well at the moment,” said Ms. Solanko But the idea that sanctions and an exodus of Russian companies would cause the economy to collapse quickly was never realistic. “Economies don’t just go away,” he said.
Credit…Maxim Shipenkov/EPA, via Shutterstock
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