The Russian economy is collapsing, devastated by Putin’s war in Ukraine

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The Russian economy is collapsing, devastated by Putin’s war in Ukraine

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  • According to some estimates, the Russian economy is on track to shrink by 15% in 2022, as the war in Ukraine and Western sanctions have put enormous pressure on the country.
  • The country is nearly excluded from global finance and imports and exports are expected to plummet as inflation is set to skyrocket.
  • Putin’s war is likely to wipe out 15 years of growth and plunge the Russians into economic chaos not seen since the 1990s.

The Russian economy nearly imploded in the 1990s. It shrank by 7% a year on average for seven consecutive years.

The experience lingers in the minds of the Russians who lived it. Indeed, President Vladimir Putin has historically framed himself as Russia’s savior, providing a stable economy and restoring national pride.

Now, however, Putin’s brutal war in Ukraine is set to wipe out 15 years of growth and send the Russian economy back to the dark days following the fall of the Soviet Union.

Sanctions by the United States and its allies have reduced Russia’s access to the global financial system, with the central bank cut off from just under half of its $ 640 billion in global foreign exchange reserves.

Western companies, from McDonald’s to Coca-Cola to Shell, are “self-sanctioning” and abruptly withdrawing from the country. The ruble, the Russian currency, has been running wild. Inflation is skyrocketing.

The Russian economy will shrink dramatically

The think tank of the Institute for International Finance estimates that Russia’s gross domestic product – the most common measure of the size of an economy – will collapse by a disastrous 15% in 2022. Along with a 3% decline in 2023, it will erase 15 years of growth, believes the IIF.

Goldman Sachs thinks the economy will shrink 10% this year, having previously predicted 2% growth. Capital Economics expects a 12% contraction.

“The impact on Russia will come from virtually all sectors,” Liam Peach, an emerging market economist at Capital Economics, told Insider. The consultancy expects unemployment to rise from 4.1% to 8% by the end of 2022.

Peach said the move by Western governments to ban some Russian banks from Swift, a key global payment messaging system, will hit non-energy exports hard. Meanwhile, the US has banned the import of Russian oil and the UK is following suit.

Goldman Sachs believes sanctions and self-sanctions by Western companies will drop imports by 20% this year and exports by 10%.

Inflation is set to rise to 20%

Western governments are panicking at high inflation rates of between 5% and 8%. But Russians are likely to face inflation of 20% or more by the end of the year, according to economists.

A weaker ruble will drive up the price of imports, while sanctions and the withdrawal of Western companies risk drastically reducing the supply of goods and services.

“The supply-side shock will be absolutely horrific,” Madina Khrustaleva, a Russian analyst at consulting firm TS Lombard, told Insider.

To know more: Moscow insiders describe panic, frustration and shame when Russia is cut off from the global economy

The central bank raised interest rates to 20% to try to stem withdrawals from Russian banks. But punitive interest rates are bound to cause a steep decline in lending and investment.

Khrustaleva said the rapid withdrawal of foreign investment and companies is likely to cause major changes in the economy. The government will play a much more important role and the production of raw materials will become even more important. He said it would be like the 90s in reverse.

“In the 1990s, we realized that this structural change will lead to this increase in productivity,” said Khrustaleva. “Now we have the 90s, but the other way around. It’s a huge loss of productivity.”

Raw materials and a rising ruble can relieve pain

Russia’s only ray of hope is that its brutal war in Ukraine has greatly increased global commodity prices. Russia is the world’s third largest oil producer and supplies Europe with a third of its natural gas.

Goldman economists believe Russia is still expected to experience 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 due to the escalation of peace talks. Investors hope that the end of the war will see Russia at least partially reintegrated into the world economy.

But things could also get worse. Peach, of Capital Economics, said an EU move to limit energy imports would have a huge impact and could trigger “a wave of corporate insolvencies.”

The outlook is bleak, but highly uncertain. The Russian economy is, more than ever, in Putin’s hands.

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