An economy that bears the massacre sanctions right now

Russian President Vladimir Putin meets with Chairman of the Federal Financial Supervisory Service (Rosfinmonitoring) Yuri Chikhanchin at the Kremlin in Moscow, Russia on June 27, 2022.

Michael Metzel | The Kremlin | Sputnik | via Reuters

Russia’s economy shrank in the second quarter – the first full three months since the country invaded Ukraine – and economists are divided over whether it can survive the onslaught of international sanctions in the long term.

The Russian economy contracted 4% year-over-year during the second quarter, although this was less sharp than the 5% analysts had expected. The Russian Central Bank It expects the slowdown to deepen in the coming quarters, reaching its lowest level in the first half of 2023.

It comes as Moscow seeks to recalibrate its economy in the face of a barrage of sanctions imposed by Western powers in response to the war, which have disrupted trade and completely alienated Russia from the global financial system.

Liam Peach, chief emerging markets economist at Liam Peach, said: “There have been signs of stabilization in many sectors over the past month or two, but we don’t expect the downturn to bottom until the second quarter of 2023, and we believe the economy will catch on. stagnates at best after that.” Capital Economics.

The immediate impact of the sanctions was mitigated by the swift actions taken by the Central Bank of Jordan to deploy capital control measures and sharply raise interest rates. These measures have stabilized local markets and even seen the ruble become one of the world’s best performing currencies so far this year.

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Subsequently, fiscal stimulus measures and significant interest rate cuts were also implemented, reducing the short-term impact of the sanctions. Late last month, the central bank shocked 150 basis points reduction In Russia’s key interest rate, raising it to 8%, marking the fifth straight cut since it launched an emergency hike from 9.5% to 20% in late February.

Beach added, “The slowdown could have been much deeper but the central bank took immediate action to prevent a financial crisis. It also appears that the resilience of the Russian energy sector has mitigated the impact of Western sanctions.”

but, Many economists consider the long-term damage to the Russian economy to be much more seriousThe flight of business and talent is gradually putting pressure on economic activity, along with a lack of access to vital technologies.

Meanwhile, the sanctions severely affected some areas of the economy, with industrial production down 4% on a quarterly basis, and production in import-dependent sectors declining by more than 10%.

Consumer demand also weakened sharply. Retail sales fell 11% qoq after that Brutal Inflation Shock in MarchWhile consumer confidence collapsed and monetary conditions tightened.

“The third quarter is likely to be another weak quarter, albeit with a smaller contraction than in the second quarter. The slowdown in retail and manufacturing sales eased, inflation eased and monetary conditions eased,” Beach said.

“However, the economy continues to face severe headwinds, including limited access to Western technology and an imminent ban on providing insurance for Russian oil shipping, which we believe will lead to a 10% drop in production next year.”

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Capital Economics does not expect Russian GDP to fall to its lowest levels for another year or so.

blunder does not drown

August 24 marks six months since global sanctions were imposed on Russia in response to its invasion of Ukraine on February 20. More than 11,000 international sanctions on the country.

Although many economists focus on the long-term structural threats to the Russian economy – which the government and central bank are seeking to confront – the immediate collapse that some had predicted did not come to fruition.

“Despite the onslaught of sanctions and the expectations of many observers, the Russian economy has not collapsed from within, and although it is facing a 5-6% contraction this year, it is not in danger of collapse or likely to face any form of economy or Financial said Chris Weaver, CEO of Moscow-based Macro-Advisory.

“However, it faces five to seven quarters of low single-digit downturns and a long list of challenges that, if not addressed effectively, will keep growth near stagnation for many years.”

In a research note on Friday, Weaver noted that the Russian economy is “stumbling, not sinking.”

Macro-consulting estimates that the Russian state accounts for more than 60% of GDP, while small and medium-sized businesses make up less than 25%. He added that this imbalance restricts growth in normal times, but isolates the economy in times of crisis.

“Government, businesses and people are used to economic crises (this is the fifth since 1991) and support structures for employers and social spheres are well developed,” Weaver said.

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

Weaver also disagreed with recent reviews that The economy is on a long road to “oblivion”, Arguing that the mass emigration of Western companies from Russia would not be detrimental to activism as is widely assumed.

“Most of these departures are either small businesses (such as retail businesses) or sold to local buyers. Of the 50 largest foreign-controlled companies, only three have completely closed their doors,” he said.

“Three other companies sold to local buyers and 10 others said they were planning to sell to a local buyer. Others stayed. We calculate the damage from GDP as less than 1% because operating assets will remain in the country.”

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

But Weaver is not convinced. “There is a great deal of skepticism about Russia’s so-called resilience and ability, and even willingness, to invest in localization, especially given how little has been done in areas such as technology, engineering and specialized services over the past 20 years,” Weaver added.

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

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