Economists split over Russia’s economic outlook

Russia’s economy contracted in the second quarter (three months after it invaded Ukraine), and economists are divided over whether it can continue to weather the onslaught of international sanctions long term.

Russia’s economy contracted 4% year-on-year in the second quarter, not as much as 5% analysts expected. The Central Bank of Russia expects the recession to deepen in the coming quarters and reach a low point in the first half of 2023.

That comes as Moscow scrambles to realign its economy in the face of a barrage of sanctions imposed by the West in response to a war that has disrupted trade and nearly eliminated Russia from the global financial system. will occur.

“Despite signs of stabilization in many sectors over the past month or two, we do not expect the recession to bottom out until the second quarter of 2023, after which the economy will stagnate at best. Thinks ”capital economics.

The immediate impact of the sanctions was mitigated by the CBR’s swift action to roll out capital control measures and sharply raise interest rates. The move stabilized the domestic market and made the ruble one of the world’s best performing currencies so far this year.

Fiscal stimulus and sharp cuts in interest rates have since come into play, dampening the near-term impact of sanctions. Late last month, the central bank cut Russia’s main interest rate by 150 basis points to his 8%, marking the fifth straight cut since he launched an emergency rate hike from 9.5% to 20% in late February. I was shocked when I went.

“The recession could have been more severe, but the central bank took immediate steps to prevent the financial crisis from taking hold. And the resilience of Russia’s energy sector appears to have softened the impact of Western sanctions. ‘ added Peach.

However, many economists believe the long-term damage to the Russian economy will be much more severe, as the outflow of business and talent, along with lack of access to key technologies, is gradually squeezing economic activity. I’m here.

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

Consumer demand has also weakened sharply. Retail sales fell 11% quarter-on-quarter after March’s brutal inflation shock, but consumer confidence collapsed and financial conditions tightened.

“Q3 is likely to be another weak quarter, albeit with a smaller contraction than Q2. Retail sales and manufacturing declines have moderated, inflation has eased and financial conditions have eased,” Peach said. said Mr.

“That said, the economy still faces serious headwinds, including limited access to Western technology and the imminent provision of insurance for Russia’s oil shipments, and we expect it to continue to grow in the coming year. Production is expected to drop by 10%.”

Capital Economics doesn’t believe Russia’s GDP will bottom out in a year or so.

Struggling instead of drowning

August 24 marks six months since global sanctions were first imposed on Russia in response to its invasion of Ukraine on February 20.

Many economists focus on long-term structural threats to the Russian economy, which the government and central bank are scrambling to counter, but a more immediate collapse than some predicted. Not realized.

“Despite the onslaught of sanctions and the forecasts of many observers, the Russian economy has not collapsed, facing a contraction of 5-6% this year, but is in no danger of collapsing, economic or financial We are not likely to experience a crisis,” said Chris Wiefer, CEO of Moscow-based Macro Advisory.

“However, we faced low single-digit declines in the fifth to seventh quarters, and we face a long list of challenges that, if not effectively addressed, will continue to keep growth near stagnant for years to come. I have.”

In a research note on Friday, Wiefer suggested that the Russian economy was “struggling, not drowning.”

The Macro Advisory estimates that the Russian state accounts for more than 60% of GDP, while SMEs account for less than 25%. This imbalance not only limits growth in normal times, but also shuts down the economy in times of crisis, he added.

“Governments, businesses and people are used to economic crises (this is the fifth time since 1991), and employers and social support systems are well-developed,” Wiefer said.

Meanwhile, business confidence fell sharply in March and April but returned to long-term averages in both manufacturing and services.

Wiefer also disagrees with recent assessments that the economy is on a long road to ‘oblivion’, noting that the mass exodus of Western companies out of Russia is as damaging to activity as is widely assumed. argued not.

“Most of the exiting companies are small businesses (such as retailers) or have sold to local buyers. Of the top 50 foreign-owned companies, only three have closed completely,” he said. said.

“Another three have sold to local buyers and 10 have said they plan to sell to local buyers. calculated to be less than

This is in stark contrast to the “devastating” hit predicted by a Yale University study released last month that analyzed high-frequency consumer, trade and shipping data. The authors of the study argue that sanctions and the outflow of more than 1,000 global companies are “paralyzing” the Russian economy.

But Weafer isn’t so sure. “There is a lot of skepticism about Russia’s so-called resilience and ability, even its willingness to invest in localization, especially given how little has been done in the last two decades in areas such as technology, engineering and professional services. There is a theory.” Weefer added.

“But as previous crises have shown, Russia usually has no other choice and usually only then addresses such issues.”