“The official forecast should result in a contraction of more than 10% (of GDP)† in 2022 this Tuesday warned Alexei Kudrin, Vladimir Putin’s former finance minister between 2000 and 2011, quoted by the Russian news agency Ria Novesti.
This decline in activity, which will continue in the coming months, is the result of sanctions imposed on Russia by Western countries in response to the invasion of Ukraine decided by Moscow on February 24. According to the estimate of Focus Economics, an expert firm specializing in economic forecasting, the recession could reach 8.4% by 2022. This is a dramatic revision of 9.1 percentage points compared to the February estimate! And the country should still be in recession in 2023, at -0.8%. “The departure of foreign firms will bring down investment, while rising inflation, a deteriorating labor market, high interest rates and a weak ruble are expected to reduce private spending”emphasizes Focus Economics.
The weight of the energy sector
Russia has the particularity of being largely dependent on its energy sector. Before the war in Ukraine, it weighed 20% to 25% of GDP, 65% of exports and 30% of the country’s budget revenues. This is why Volodymyr Zelensky, the Ukrainian president, insists that Europeans must suspend all purchases of Russian hydrocarbons in order to allow Moscow to bend. A decision that is the subject of intense debate dividing European states, some of which, such as Germany, Italy or Hungary, have economies heavily dependent on these imports. To date, only coal purchases have been banned. According to the CREA site, which has been monitoring these hydrocarbon purchases daily since February 24, EUR 30.4 billion has been paid to Russia (including EUR 19 billion for gas alone).
Last Friday, an important new sanction was added to the list: the removal by the United States of the most favored nation clause for Russia – Belarus is also sanctioned – allowing it to enjoy the same commercial advantages as any other state, for the import of a similar product. This restriction allows any country to levy customs duties on Russian imports. A new phase that transforms the country into a pariah state like North Korea.
Sign of this progressive suffocation, Moscow was unable to honor the payment of coupons on eurobonds in dollars on April 4 and offer a payment in rubles. This led to the downgrading by the rating agency Standard & Poor’s of its foreign currency issuer’s creditworthiness to “selective default” status. The issuer’s creditworthiness in local currency remains “under revision with negative implications”. A demotion that brings it inexorably closer to the standard it has been able to avoid thus far. “Russia has tried in good faith to repay external creditors by transferring the corresponding foreign currency amounts to pay our debt. Nevertheless, the deliberate policy of western countries is to artificially create default by all means”, criticized Russian Finance Minister Anton Siluanov, waving the threat of legal action. Some companies have already failed to honor refunds in dollars, such as RZD, the Russian railway company or the diamond mining group Alrosa.
Inflation at 16.7%
Domestically, Russian households are experiencing a rise in inflation, rising in one year to 16.7% in March, from 9.15% in February. The price increase is mainly supported by the weakness of the ruble, which is increasing import costs, and the reduction in the supply of consumer goods, pushing up food and energy prices. Experts from Focus Economics predict a percentage of 19.9% in 2022 and 12% in 2023.
To support its currency, the Russian Central Bank doubled this rate to 20% on February 28 to stabilize the macroeconomic environment, before lowering it to 17% on April 8 to contain the rise in inflation. At the end of the year it would be about 18.69% and by 2023 11%. In fact, the general price increase weighs on manufacturing activity. The PMI index fell to 44.1 points in March (below the 50 threshold signifies a contraction in activity), after having already contracted to 48.6 points in February. This is the lowest in 22 months. The decline is even more spectacular in the services sector, where, while still positive in February, at 52.1 points, it fell to 38.1 points in March.
Less evil, the Russian currency has stabilized at pre-war levels. On Tuesday, the dollar traded around 83 rubles and the euro around 91 rubles. “Through interventions by the Russian Central Bank, the ruble has regained the ground lost since March” (the dollar traded at over 130 rubles at the time) after the reduction of the national debt to the “junk” category, recalls Focus Economics. The Russian Central Bank has since Monday abolished the 12% commission on the purchase of foreign currency and lifted the ban on the sale of foreign currency to private individuals from April 18.
The ruble benefits from support in the form of an obligation for exporting companies, especially in the hydrocarbon sector, to convert into rubles at least 80% of the foreign currency they receive from their sales.
An impact on global growth
However, this adaptation to the evolution of sanctions could have limits. In Kiev on Friday, European Commission President Ursula Von der Leyen, who visited the Ukrainian president, predicted that “Russia will sink into economic, financial and technological decline”. But this will too can set limits, especially with regard to the impact on the global economy. “The current negotiations between Ukraine and Russia could lead to a ceasefire. But they were also unable to succeed and a new escalation cannot be ruled out. In this case, which would include even tougher sanctions and counter-sanctions, global inflation could reach 7% by 2022 and economic growth could be capped at +2.5% before the global economy plunges into recession. in 2023 (-0.3%)”warns Ana Boata, director of economic research at Allianz Trade.