Filenews 3 August 2022
The resilience of Russia's economy to Western sanctions, as a result of its invasion of Ukraine, is temporary, many economists estimate, warning that the country is facing "economic oblivion".
The International Monetary Fund last week revised its forecasts for Russia's GDP in 2022 by 2.5 percentage points, estimating that the Russian economy will finally contract this year by 6% instead of the 8.5% previously expected. According to the Fund, the Russian economy looks more resilient to economic sanctions than expected.
And Russia's Central Bank surprised markets at the end of July, lowering its key interest rate to 8%, which is below the pre-war level in Ukraine, citing the easing of inflation, the strong currency and the risk of recession.
The rouble also rebounded strongly from the historic "plunge" it recorded immediately after the invasion of Ukraine, with the Russian currency even showing the best performance in the global foreign exchange market this year, silencing Russian President Vladimir Putin's claims that Western sanctions failed to meet their goals.
Meanwhile, Russia continued to export energy and other commodities, mainly taking advantage of Europe's dependence on Russian gas.
However, despite these developments, as CNBC points out, many economists estimate that in the long term the blow to the Russian economy will be strong, due to the exit of foreign companies from the country - which will affect production capacity and cause a "brain drain" - but also the loss of important oil and gas markets, as well as the now reduced access to critical technologies.
Ian Bremmer, president of the Eurasia Group, told CNBC on Monday that although the short-term turbulence from Western sanctions is milder than initially expected, the real challenge extends beyond 2022.
"Unpublished data suggest that the transfer of production activities intensifies as stocks run out and the shortage of spare parts from abroad causes problems," Bremmer points out.
More specifically, Bremmer emphasizes that as Western sanctions intensify and popular discontent increases, Russians with higher education leave the country, underlining the substantial blow that trade sanctions on sensitive technologies bring but also "their long-term effects, which undermine productivity and growth".
"The brain drain leads to an immediate reduction in the working-age population, especially high-productivity workers, reducing GDP," explains the president of the Eurasia Group and adds: "It affects productivity as a whole, limits innovation and hurts overall confidence in the economy, reducing investment and savings."
In this context, the Eurasia Group predicts a sustained, long-term decline in economic activity which will eventually lead to a contraction of Russian GDP by 30%-50% compared to the pre-war level in Ukraine.
'Catastrophic blow'
A Yale University report published in July, which analyzes high-frequency data on consumer, commercial and shipping transactions, which according to the author of the study gives a truer picture than the one presented by the Kremlin, is on a similar wavelength.
According to this report, the claims that Russia's economy is managing to survive the sanctions are too embellishing.
The study points out that international sanctions and the exodus of more than 1,000 multinational companies from Russia are dealing a "devastating blow" to the country's economy.
"Russia's strategic position as an exporter of goods has deteriorated irrevocably, as it now faces from a position of weakness the loss of its old key markets and faces intense challenges by making a 'shift to Asia' with non-fungible exports such as natural gas," the Yale report says.
He adds that Russian has "largely collapsed", with Moscow now facing challenges in securing inputs, spare parts and technology from increasingly disgruntled trading partners and as a result experiencing widespread supply shortages.
"Despite Putin's illusions about self-sufficiency and import substitution, Russian domestic production is completely frozen as it does not have the ability to replace the businesses, products and talent that have left the country. The loss of domestic innovation and a productive base has led to skyrocketing prices and consumer dissatisfaction," the university's report also points out.
"As a result of the business 'retreat', Russia lost companies representing about 40% of its GDP, reversing a course of foreign investment of nearly three decades and reinforcing the unprecedented simultaneous flight of capital and population, in a massive exodus of an economic base," Yale's report concludes.
No way out of "economic oblivion"
The apparent resilience of the Russian economy and the recovery of the rouble are largely attributed to the surge in energy prices and the strict capital controls - implemented by the Kremlin in order to limit the outflows of foreign exchange from the country - alongside restrictions on Russian imports.
Russia is the world's largest gas exporter and the second largest oil exporter, and as a result the blow to GDP from the war and subsequent Western sanctions has been mitigated by high energy prices and Europe's continued dependence, for the time being, on the Russian energy sector.
Russia has now relaxed some of its capital controls and cut its interest rates in an effort to weaken the rouble and boost its fiscal figures.
"Putin is resorting to a blatantly unsustainable fiscal and monetary intervention to smooth out these structural economic weaknesses, which has resulted in the state budget showing a deficit for the first time in many years and is wiping out foreign exchange reserves despite high energy prices - and the Kremlin's finances are in a much more dire situation than, what is considered," Yale economists note.
They also point out that Russia's domestic financial markets are the worst performing in the world so far this year, despite strict capital controls, with investors discounting "the persistent, persistent weakness of the economy due to the limitation of liquidity and credit", but also the ostracism of Russia from international financial markets.
"Looking ahead, there is no way out of economic oblivion for Russia as long as the allied countries remain united in terms of maintaining and increasing pressures against Moscow," Yale's report notes.
"The defeatist headlines that Russia's economy has recovered are simply not substantiated - the data show that at every level the Russian economy is shaken and now is not the time to put the brakes on," the university's economists conclude.
Source: Capital.gr
