Russia faces ‘economic forgetfulness’ despite short-term resilience

Several economists said that Russia faces “economic forgetfulness” in the long run due to international sanctions and corporate flight.

The International Monetary Fund last week raised Russia’s GDP estimate for 2022 by 2.5 percentage points, meaning the economy is now expected to contract by 6% this year. The International Monetary Fund said the economy appears to be weathering the barrage of economic sanctions better than expected.

The Russian Central Bank It surprised markets in late July with a key interest rate cut to 8%, below its pre-war level, indicating slowing inflation, a strong currency and the risk of recession.

The rubles Recovered from early historical losses following the invasion of Ukraine to To become the best performer in the global foreign exchange market This year, prompting Russian President Vladimir Putin to declare Western sanctions a failure.

Meanwhile, Russia continued to export energy and other goods while benefiting from Europe’s reliance on gas supplies.

However, many economists see long-term costs to the Russian economy from the exit of foreign firms – which will damage productive capacity and capital and lead to a “brain drain” – along with the loss of long-term oil and gas markets and diminished access to critical imports of technology and inputs. .

Ian Bremer, president of the Eurasia Group, told CNBC Monday that while the short-term disruptions from the sanctions are less than originally expected, the real controversy extends beyond 2022.

“Anecdotal evidence suggests that manufacturing disruptions are on the rise as stocks are depleted and the scarcity of foreign parts has become binding. Chips and transportation are among the sectors mentioned, which in some cases reflects dual-use military demand,” Bremer said.

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

Bremer highlighted that as sanctions intensify and popular discontent grows, intellectuals are leaving Russia, stressing the importance of trade sanctions on sensitive technologies and “the longer timetable under which sanctions undermine the productivity and growth of the trend.”

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

“It affects overall productivity, reduces innovation and affects public confidence in the economy, reduces investment and savings.”

The Eurasia Group expects a sustainable and long-term decline in economic activity that will eventually result in a 30-50% contraction of Russian GDP from its pre-war level.

“disastrously disabled”

A Yale University study published last month, which analyzed high-frequency consumer, trade and shipping data whose author’s claim provides a truer picture than the Kremlin does, argued that rumors about Russia’s economic survival were greatly exaggerated.

The newspaper pointed out that international sanctions and the displacement of more than 1,000 international companies “disastrously paralyze the Russian economy.”

“Russia’s strategic position as a commodity exporter has deteriorated irreversibly, as it is now dealing from a position of weakness with the loss of its former major markets, and faces severe challenges in implementing a ‘pivot to Asia’ with non-fungible exports such as gas pipelines,” said Yale University economists. .

They added that despite some “ongoing leakages”, Russian imports have “largely collapsed”, with Moscow now facing challenges in securing inputs, parts and technology from increasingly strained trading partners and, as a result, experiencing widespread supply shortages in its domestic economy. .

“Despite Putin’s delusions of self-sufficiency and import substitution, Russian domestic production has come to a complete halt with the inability to replace lost companies, products and talent; emptying Russia’s domestic innovation and production base has led to higher prices and consumers,” the report said.

As a result of the trade downturn, Russia lost companies representing about 40% of its GDP, reversing nearly three decades of foreign investment and simultaneously supporting an unprecedented flight of capital and population in a mass exodus of Russia’s economic base.

No way out of ‘economic oblivion’

The apparent resilience of the Russian economy and the ruble’s recovery are largely attributable to high energy prices and strict capital control measures – which the Kremlin has implemented to limit the amount of foreign currency leaving the country – along with sanctions that limit its ability to import.

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

Russia has now loosened some of its capital controls and lowered interest rates in an effort to lower the currency and shore up its fiscal account.

“Putin is resorting to dramatic and clearly unsustainable fiscal and monetary intervention to mitigate these structural economic vulnerabilities, which have already led to his government budget deficits for the first time in years and depleted his foreign reserves even as energy prices — and the Kremlin’s financial resources — have risen,” said economists at Yale University. “They are in much more tatters than is traditionally understood.”

They also noted that Russia’s domestic financial markets have been the worst performing in the world so far this year despite strict capital controls, with investors pricing in “ongoing and persistent weakness within the economy with diminished liquidity and credit,” along with Russian ostracism. effective. of the international financial markets.

Looking to the future, the report concluded, “there is no way out of Russia’s economic oblivion as long as the allied nations remain united in maintaining and increasing the pressures of sanctions against Russia.”

“Backed headlines arguing that the Russian economy has rebounded are simply not realistic – the facts are that the Russian economy, by any measure and at any level, is reeling, and now is not the time to put the brakes on.”