Russia’s economy collapsed in the 1990s. It shrank by 7% a year on average for seven consecutive years. The experience remains in the minds of the Russians who lived it. Indeed, President Vladimir Putin has historically been described as Russia’s savior, providing a stable economy and restoring national pride. Now, however, Putin’s violent war in Ukraine is going to wipe out 15 years of growth and send the Russian economy back to the dark days after the collapse of the Soviet Union. US and allied sanctions have cut off Russia’s access to the global financial system, with the central bank cut in half of its $ 640 billion global foreign exchange reserves. Western companies, from McDonald’s to Coca-Cola to Shell, are “self-certifying” and abruptly withdrawing from the country. The ruble, the currency of Russia, has gone crazy. Inflation is skyrocketing. Russia’s economy will shrink dramatically The Institute for International Finance think tank estimates that Russia’s gross domestic product – the most common measure of the size of an economy – will fall by 15% in 2022. Together with a 3% drop in 2023, it will disappear 15 years of growth, the IIF. Goldman Sachs believes the economy will shrink by 10% this year, having previously expected 2% growth. Capital Economics forecasts a 12% contraction. “The impact on Russia will come from almost every sector,” Liam Peach, an emerging market economist at Capital Economics, told Insider. The consulting firm expects unemployment to jump from 4.1% to 8% by the end of 2022. Peach said the move by Western governments to cut some Russian banks off of Swift, a critical global payment messaging system, would hit exporters hard. Meanwhile, the United States has banned the import of Russian oil, and the United Kingdom is following suit. Goldman Sachs believes that sanctions and self-sanctions by Western companies will cause a 20% drop in imports this year and a 10% drop in exports. Inflation is expected to jump to 20% Western governments are panicking in the face of high inflation rates between 5% and 8%. However, Russians are likely to face 20% or more inflation by the end of the year, according to economists. A weaker ruble will push up the price of imports, while sanctions and the withdrawal of Western companies are likely to reduce the supply of goods and services. “The supply shock will be absolutely horrible,” Mantina Khrushleva, a Russian analyst at consulting firm TS Lombard, told Insider. Read more: Moscow experts describe panic, frustration and shame as Russia is cut off from the world economy The central bank raised interest rates to 20% to try to limit withdrawals from Russian banks. But punitive interest rates are set to drop sharply in lending and investment. Khrustaleva said the rapid withdrawal of foreign investment and companies was likely to cause significant changes in the economy. The government will play a much bigger role and the production of goods will become even more important. He said it would be the other way around in the 1990s. “Back in the 1990s, we realized that this structural change would lead to this increase in productivity,” Khrustaleva said. “Now, you have the ’90s, but you go the other way. It’s a huge loss of productivity.” Commodities and the rising ruble can ease the pain The only hope for Russia is that its violent war in Ukraine has sharply boosted world commodity prices. Russia is the world’s third-largest oil producer and supplies Europe with one-third of its natural gas. Goldman economists believe that Russia should still have a large trade surplus in 2022, bringing foreign currency into the country and somewhat reducing the pain for the financial system. Meanwhile, the ruble has risen sharply in recent days as peace talks have intensified. Investors hope the end of the war could lead to Russia at least partially reintegrating into the world economy. But things could also get worse. Peach, of Capital Economics, said an EU move to cut energy imports would have a huge impact and could cause “a wave of corporate bankruptcies”. The outlook is bleak, but extremely uncertain. The Russian economy is, more than ever, in Putin’s hands.
