Ukraine war backfires as Russia’s economy is expected to take dramatic 10 per cent hit this year
Analysts this morning revised their economic forecast for Russia in light of international sanctions imposed following the invasion of Ukraine.
Experts at the Economic Intelligence Unit (EIU) said they expect economic activity to be severely disrupted with both domestic demand and the external sector taking a hit.
“While the full impact of international sanctions and voluntary boycotts by western companies is difficult to estimate, we expect substantial disinvestment, forced suppression of imports, contraction in exports and major hit to private consumption. We forecast that the Russian economy will contract by 10 per cent in 2022,” they shared in a note sent to Morning Wire
“Economic policy will aim to offset the impact of Western sanctions, but swingeing sanctions targeting the reserves of the Central Bank of Russia (CBR) will limit the tools available,” the analysts added.
“The imposition of capital controls aims to prevent the outflow of currency and protect against bank runs and serious defaults.”
They expect the rouble is to weaken further, fuelling inflation which will be further “exacerbated by overreaching good shortages from pharmaceuticals to machinery.”
The EIU analysts call the Russian government’s response so far “muted” and the measures, such as credit breaks and financial support for large businesses and low-income families, will be “insufficient to offset the impact of sanctions.”
According to the EIU, the Putin government is facing a three-dimensional crisis for its finances.
Firstly, a significant share of government spending will be re-directed at the military offensive in Ukraine.
Secondly, being cut off from international financial markets and with the domestic banking sector at grave risk, the government’s ability to raise capital is severely constrained.
Thirdly, they expect energy exports, which are a key contributor to revenue, to be disrupted, even though the EU has not banned imports of Russian energy.
Foreign companies are nevertheless avoiding Russian oil which is now trading at lower than market price as a result of the high risks attached to this trade.
“The weak rouble, logistical constraints and severe goods shortages will lead to a spike in inflation which we currently forecast at 15 per cent on average in 2022,” they added.
“The risks to the Russian economy are tilted heavily to the downside. The negative impact of the war and sanctions will have lasting medium and long-term implications,” the analysts concluded.