Russia’s economy shrinks sharply as war and sanctions continue

Russia’s economy shrank sharply in the second quarter as the country felt the brunt of the economic consequences of its war in Ukraine, in what experts believe is the start of a years-long recession.

Russia’s statistics agency said, on Friday, that the economy shrank by 4 percent from April to June compared to the previous year. This is the first quarterly GDP report to fully capture the change in the economy since the invasion of Ukraine in February. It was a sharp reversal from the first quarter, when the economy grew 3.5 percent.

Western sanctions, which have deprived Russia of about half of its $600 billion emergency stockpile of foreign currency and gold, have severely restricted dealings with Russian banks and cut off access to US technology, prompting hundreds of major Western companies to withdraw from the country. .

But even with the depletion of imports into Russia and the suspension of financial transactions, Forcing the country to default on its foreign debtRussia’s economy has proven more resilient than some economists initially expected, and the drop in GDP reported on Friday was not as severe as some had expected in part because the country’s coffers were flooded with energy revenue as global prices soared.

However, analysts say the economic losses will grow heavier as Western countries increasingly move away from Russian oil and gas, two important sources of export revenue.

“We thought this would be a deep dive this year, and then even abroad,” said Laura Solanko, senior advisor at the Bank of Finland’s Institute for Economics in Transition, of the Russian economy. Instead, there has been a more moderate economic downturn, but one that will continue into the coming year, putting the economy in a less profound two-year recession, she said.

Russia, which had an economy of $1.5 trillion before the war began, moved quickly in the days after the invasion to mitigate the impact of the sanctions. central bank More than double the interest rate to 20 percent, he imposed severe restrictions on the flow of money out of the country, closed stock trading on the Moscow Stock Exchange, and eased regulations on banks, so lending did not stop. The government also increased social spending to support families and loans to businesses affected by the sanctions.

The measures mitigated some of the impact of the sanctions. and like ruble bounced, Russian finances have benefited from high oil prices.

‘Russia withstood the shock of initial sanctions’ “It has been relatively resilient so far,” said Dmitriy Dolgin, chief economist covering Russia at Dutch bank ING Bank. But he noted that unless Russia succeeds in diversifying its trade and financing, the economy will be weaker in the long run.

The statistics agency said retail trade fell by about 10 percent, while wholesale business activity fell by 15 percent.

The data released on Friday is in line with other reports from Russia, said Michael S. Bernstam, a researcher at Stanford University’s Hoover Institution. He, too, expects the economy to deteriorate in the second half of this year, and then again in 2023.

As the war drags on, many countries and businesses will look to permanently end ties with Russia and its local businesses. Companies will struggle to get parts for Western-made machines, and software will need updates. Russian companies will need to rearrange their supply chains as imports shrink.

The prospects for the Russian energy industry, which is central to the country’s economy, are deteriorating. The US and Britain have already banned Russian oil imports, and the country’s oil production will fall further early next year when the full impact of the EU’s ban on imports takes effect. Russia will need to find customers for about 2.3 million barrels of crude oil and petroleum products per day, which is about 20 percent of its average production in 2022, according to the International Energy Agency.

So far, countries like India, China and Turkey have absorbed some of the lost trade from Europe and the United States, but it’s unclear how many new buyers can be found.

Reliance on Russian natural gas has also been reduced. In the last week of June, total EU gas imports from Russia were down 65 percent from a year earlier, according to Report from the European Central Bank. Some of these declines were imposed on Europe because Russia cut off its gas supplies. But European countries have intensified their efforts to find alternative sources and are, for example, rapidly developing infrastructure for additional imports of liquefied natural gas.

The economy will suffer from “depletion of investment-import stocks, enforcement of the EU oil embargo, increased financial pressure on households and their greater dependence on the state”, while the ability of the central bank and government to provide cash is limited, ING’s Dolgin wrote.

Soon after the invasion of Ukraine, inflation in Russia soared as households scrambled for goods they expected would become scarce. In July, inflation was above more than 15 percent, According to the Central Bank of Russia. Already, though, there are signs that inflation is slowing, and as a result The central bank cut interest rates to 8 percentlower than it was before the war.

Last month, the bank said that business activity had not slowed as much as expected, but that the economic environment “remains challenging and continues to significantly constrain economic activity.”

The bank expected the economy to shrink 4 to 6 percent this year, much less than originally forecast right after the war began. This 6 percent figure also matches the latest An update from the IMF.

The central bank said on Friday that the economy will experience a deeper contraction next year and will not return to growth until 2025. The bank expected the inflation rate to range between 12 and 15 percent by the end of the year.

In the coming months, supply chain issues will present challenges, as companies constrained by sanctions try to shift their supply chains to replenish stocks of finished and raw goods.

“I don’t think the Russian economy is doing well at the moment,” said Ms. Solanko. But the idea that sanctions and a corporate exit from Russia would cause the economy to collapse quickly was not at all realistic. “Economies don’t fade,” she said.