A leaked study earlier this month from Russia’s Finance Ministry warned that the country could see GDP fall by 12 per cent this year, after 4.7 per cent growth in 2021. The latest prognosis from within Russia, if confirmed, is even more pessimistic than earlier forecast downgrades. The IMF had already revised its estimates sharply down in late April, by a whopping 11.3 per cent from the January 2022 forecast. And 2023 was revised downwards by 4.4 per cent, taking that year into negative territory too.
The Russian analysis supports the view that the sanctions are biting. The IMF GDP calculation was based on the assumption that sanctions and policies announced so far—such as the commitment by the EU to reduce dependence on energy imports from Russia by two-thirds by the end of the year—would be implemented. With half of Russian oil exports traditionally going to the EU and with member states dependent on Russia for 40 per cent of their gas, this would inevitably be a blow for Moscow, even if it can divert exports to other willing buyers such as India and China.
Since then, we have seen more Russian banks prevented from accessing global financial payments systems and a widening of the ban on certain goods from being exported to Russia. Additionally, the European Commission has proposed a complete ban on oil imports from Russia by the middle of the year and of other crude oil products by the end of 2022, adding to bans already announced by the UK, the US, Canada and Australia among others. Gas import embargoes are also being considered, and the Baltic countries have already moved in that direction. Given these additional measures, the sharper contraction now expected is no surprise.
There are nevertheless still questions. The main one is whether all of the extra measures will actually be implemented. For the moment, there is still no EU agreement on moving forward with the oil and crude products ban as Hungary is vetoing action. The proposals do in fact include a slower phasing out for Hungary, Slovakia and maybe some others, and there is talk of possible transfer payments from the rest of the EU to the countries most affected. On the gas embargo, progress is even slower, as a recent study suggested that for Germany this may mean much sharper GDP contraction than the 3 per cent hit talked about until recently.
The Russian government has so far distanced itself from the leaked forecast and argues that it has in fact weathered the storm well. Indeed, it finds itself with a stronger rouble than before the “special military operation” in Ukraine began?, and with domestic stock markets recovering. As is now clear, it achieved this mainly through strict capital controls, now partly relaxed, to prevent a rouble sell off and by temporarily raising interest rates from 9 per cent to 20 per cent to stabilise the currency. It can also claim to be running a trade surplus as oil and gas price rises have increased export receipts. And for the moment, the oil and gas exports are still flowing, having received a boost thanks to a reprieve from penalties for EU tankers carrying Russian oil.
But the latest data also shows a shrinkage in imports, as sanctions preventing the sale of various products to Russia, including component parts for manufacturing, begin to bite. Shortages have been evident at various times and employment is likely to suffer as companies—particularly service companies across sectors including aviation, finance, agriculture and software and technology—have withdrawn, are withdrawing, or have suspended operations.
Nevertheless, the impact so far is partly dulled as firms like McDonalds and Starbucks are still paying for workers they are not using. At the same time, those organisations that have announced their intention to leave Russia are unlikely to be able to liquidate their interests, let alone take the proceeds out of the country, in a hurry. Many are at present just writing losses off their balance sheets. One example is BP, which has announced its intention to exit from its 20 per cent share of Rosneft at a cost of $20bn. Some stranded entities will probably be acquired for little—if any—payment by companies from Russia or elsewhere, with India having asked its state-owned companies to consider buying BP’s Rosneft stake. A number of European banks with considerable Russian exposure have had to write down—effectively write off—a substantial part of the value of their operations in Russia, and also set aside money for possible future losses.
But in the meantime, sanctions are multiplying. New ones are emerging or are threatened by the EU on an almost daily basis. And if the war is prolonged and moves on to other territories, the drain on Russian resources from financing its army and the repercussions for growth will become even more apparent. After all, some $1trillion of Russian assets have been frozen by the west, if the seizures from oligarchs are added to the frozen Russian currency reserves. There are calls in Europe for some of those frozen assets to be used to help rebuild Ukraine. If that happens, they will be lost to Russia forever.
It is no surprise that under an enhanced sanctions regime the IMF expects Russian exports to fall even more sharply than under the rather downbeat baseline scenario, with no recovery even by 2027. Russia’s ability to borrow in international capital markets and its attraction to foreign investors would be seriously imperilled as a result. Of course, sanctions also harm those who impose them, but it looks like Russia will experience a long period of low to no growth, bereft of fresh investment, parts and expertise.
