Russia fends off economic collapse, but decline has begun

“I’m driving through Moscow and the traffic is the same as before,” said Andrei Nechaev, Russia’s economy minister in the early 1990s.

China and India’s attempts to acquire cheap Russian oil have helped, but Nechaev and other analysts say the Russian economy is beginning to decline and is in a long period of stagnation as a result of Western sanctions. said to be likely to face

The outflow of Western companies and the wave of Western sanctions targeting Russia’s vital energy exports and its financial system are having an impact, but not to the extent many expected.

Nechaev, who presided over some of Russia’s most tumultuous economic times and helped transition to a market economy, attributes this in part to the central bank’s achievements.
The ruble plummeted to a record low against the US dollar earlier this year following the invasion as the West froze about half of Russia’s $600 billion foreign exchange reserves. However, it has since recovered to its strongest level against the dollar since 2018. “rubble”?)

This was largely the result of aggressive capital controls and rate hikes in the spring, much of which has now been undone. Interest rates are now lower than before the war, and the central bank has said inflation, which peaked at almost 18% in April, has slowed to between 12% and 15% for the full year.

The central bank has also revised up its GDP forecast for this year, now expecting a 4% to 6% contraction. Forecasts for April saw an 8% to 10% contraction. The International Monetary Fund is also now forecasting a contraction of 6%.

Moscow was trying to build a

The Kremlin has had an eight-year run-up as the sanctions imposed by the West after Russia annexed Crimea in 2014 spurred on.

“The withdrawal of Mastercard and Visa had little impact on domestic payments as the central bank had its own alternative payment system,” says Nechaev.

Russia set up the Mir credit card and its own transaction processing system in 2017.

And there’s a reason Russian fans of McDonald’s and Starbucks still eat fast food, says Chris Wie, founding partner of Macro Advisory Ltd, a consultancy that provides advice to multinationals in Russia and Eurasia. says Farr.

Since 2014, many Western brands in Russia have bowed to government pressure and localized some or all of their supply chains. So when these companies left, it was relatively easy for Russian buyers to buy them and keep them running just by changing the wrapper and packaging.

“Same people, same product, same supply,” Weafer says.

However, it is not a completely watertight strategy.

A rebranded McDonald’s store reported a shortage of French fries in mid-July when the Russian potato crop fell short and foreign suppliers were unable to fill the gap due to sanctions.

Will Russia’s Energy Boom Continue?

Continuation of fast food is one thing. Russia’s long-term stability depends on its energy sector, which remains the country’s largest source of government revenue.

It is no exaggeration to say that high energy prices have supported Russia so far.

According to the International Energy Agency, Russia’s revenues from oil and gas sales to Europe doubled between March and July this year compared to the average in recent years. despite the reduction in volume. Gas supplies to Europe have fallen by about 75% in the last 12 months, according to IEA data.

Oil is another matter. His March forecast by the IEA that sanctions, or threats thereof, would prevent Russia from producing 3 million barrels per day of oil from April, has not materialized. Exports are holding up, but Rystad Energy analysts point to a slight drop this summer.

A major factor is Russia’s ability to find new markets in Asia.

Most of Russia’s seaborne oil exports have been to Asia since the start of the war, according to Houmayoun Falakshali of commodity consultancy Kpler. Its share was 56% in July, compared to just 37% in July 2021.

Russia's seaborne oil exports to Asia soared this year.
From January to July this year, China increased its seaborne imports of heavily discounted Russian Urals crude oil by 40% compared to the same period last year, according to Kpler data. That is despite China’s initial efforts to avoid appearing to take sides in Russia’s war against Ukraine. According to Kpler, India’s seaborne imports from Russia have increased by more than 1,700% over the same period. Russia is also increasing gas exports to China through a Siberian pipeline.

What happens when the European embargo on 90% of Russia’s oil takes effect in December is very important. Russian oil is estimated at 2 million barrels a day, and while some of it is likely to go to Asia, experts question whether demand will be high enough to absorb it all.

Russia burns millions of dollars of gas every's why

Falakshali said China cannot buy more Russian oil than it does now because of slowing domestic demand and a lesser need for certain types of oil that Russia exports.

Prices also play a key role in whether Russia can afford to keep discounting to secure new markets.

“A 30% discount off $120 a barrel is one thing,” Nechaev points out. “The discount from $70 is another matter.”

“Slow Burn”

While global inflation is supporting Russia’s energy sector, it is hurting the public. Like the rest of Europe, Russians are already suffering from a cost of living crisis, made worse by the war in Ukraine.

Nechaev, who helped steer Russia through a much more dramatic economic collapse in the 1990s, is worried.

“In terms of living standards, as measured by real incomes, we are about a decade behind,” he said.

The Russian government is spending to counter this. In May, it announced a 10% increase in pensions and the minimum wage.

Established a system that allows employees of “suspended” companies to be temporarily transferred to another employer without canceling their employment contract. He also spent 17 billion rubles ($280 million) to buy bonds of Russian airlines. This is crippled by airspace bans and sanctions that prevent foreign manufacturers from supplying maintenance and parts.

Technical sanctions, such as those affecting the aviation industry, could have the most serious impact on Russia’s long-term economic prospects. In June, US Commerce Secretary Gina Raimond said that world semiconductor exports to Russia had fallen 90% since the war began. It’s decimating production of everything from cars to computers, and experts say it will further fall behind in the global tech race.

“The impact of sanctions will be a slower burning rather than a quick blow,” Wiefer said. “Russia is now weighing the possibility of prolonged stagnation.”

Nechaev is even more decisive. “Now the economic decline has begun,” he says.

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