Economists share the prognosis for the Russian economy

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 three months since it invaded Ukraine – and economists are divided over whether the country can continue to withstand the onslaught of sanctions. international sanctions in the long run.

Russia’s economy contracted 4% year-on-year in the second quarter, although this was less pronounced than the 5% expected by analysts. The Central Bank of Russia The recession is expected to deepen in the coming quarters, reaching its lowest level in the first half of 2023.

It comes as Moscow is trying to readjust its economy in the face of a barrage of sanctions imposed by Western powers in response to the war, which has disrupted trade and all except for the boycott of Russia from the global financial system.

Liam Peach, senior emerging markets economist at Capital Economics.

The immediate impact of the sanctions was mitigated by swift action from the CBR to implement capital controls and sharply increase interest rates. These measures have stabilized the domestic market and have even seen the ruble become one of the best performing currencies in the world so far this year.

Fiscal stimulus measures and substantial interest rate cuts have since taken effect, reducing the short-term impact of sanctions. Late last month, the central bank shocked with 150 basis points reduction Russia’s prime interest rate rose to 8% and marked the fifth consecutive cut since the country introduced an emergency increase from 9.5% to 20% at the end of February.

Peach added: “The recession could be much deeper but the central bank took immediate measures to prevent a financial crisis.

However, many economists argue that the long-term damage to the Russian economy is much more severeas entrepreneurship and talent gradually squeeze economic activity, coupled with a lack of access to critical technologies.

Meanwhile, sanctions have hit some sectors of the economy hard, with manufacturing output falling 4% quarter-on-quarter and manufacturing in import-dependent sectors down more than 10%.

Consumer demand also weakened sharply; retail sales down 11% quarter-on-quarter The brutal inflation shock of Marchwhile consumer confidence collapsed and monetary conditions tightened.

“Q3 is likely to be another weak quarter, albeit a smaller drop than in Q2, Peach said.

“Despite this, the economy still faces serious difficulties, including limited access to Western technology and a ban on providing insurance for Russian oil shipments, which we think will causing production to drop by 10% next year.”

Capital Economics does not expect Russia’s GDP to bottom out in a year or so.

Shy, don’t drown

August 24 will mark six months since global sanctions were first imposed on Russia in response to its invasion of Ukraine on February 20. more than 11,000 international sanctions domestic.

Although many economists are focusing on the long-term structural threats to the Russian economy – which the government and central bank are seeking to deal with – the immediate fallout that some predictions did not come true.

“Despite the onslaught of sanctions, and the predictions of many observers, the Russian economy has not boomed and, despite facing a 5-6% contraction this year, but is not in danger of collapse or likely to experience any kind of economic or financial distress, said Chris Weafer, CEO of Moscow-based Macro-Advisory.

“However, it faces 5 to 7 quarters of a low single digit decline and a long list of challenges that, if not effectively addressed, will bring growth to near stagnation. for several years.”

In a Friday research note, Weafer suggested that the Russian economy is “floundering, not drowning.”

Macro-Advisory estimates that the Russian state accounts for more than 60% of GDP, while SMEs account for less than 25%. This imbalance, he added, limits growth in normal times but also discourages the economy in times of crisis.

“Governments, companies and people are used to economic crises (this is the fifth since 1991), and support structures, for employers and in other sectors. social sector, is developing well,” Weafer said.

Meanwhile, business confidence, which fell sharply in March and April, has returned to its long-term averages for both the manufacturing and services sectors.

Weafer also disagrees with recent assessments that the economy is on a long road to “forgetfulness”, suggested that the mass exodus of Western companies from Russia would not be as detrimental to operations as many had assumed.

“Most of these exiting companies are small companies (such as fashion retail) or have sold to local buyers. Of the top 50 foreign-controlled companies, only one is,” he said. three companies shut down completely.”

“Three others have sold to local buyers, and another 10 said they plan to sell to local buyers. Others are staying. We calculate the GDP impact to be less than 1% because of the property. operations will remain in the country.”

This is in stark contrast to the “catastrophic” hit predicted by a Yale University study published last month that analyzed high-frequency consumer, commercial and shipping data. The study’s authors argue that sanctions and the emigration of more than 1,000 global companies are “crippling” the Russian economy.

But Weafer was far from convinced. “There is a lot of skepticism about Russia’s so-called resilience and ability, even willingness to invest in localization, especially given the extent to which it has been so little done in areas such as industrial technology, engineering and expert services over the past twenty years”. Weafer added.

“But as previous crises have shown, Russia often solves such problems when there is no other choice, and often only then.”

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