Russian economy is ready to crash as sanctions take their toll

The Russian economy is poised to collapse this year after the United States and its European allies hit the Kremlin with a series of crippling economic sanctions over its unprovoked invasion of Ukraine.

Russian manufacturing activity declined in March and fell at the sharpest pace since May 2020, when companies faced a sharp rise in prices and a sharp drop in new orders. Western sanctions have effectively isolated Russia from the international financial system and prevented it from accessing new technology.

Experts believe that this is only the beginning of a major landslide for the Russian economy this year.

The Institute for International Finance (IIF), a Washington-based think tank, estimated that Russia’s gross domestic product, the broadest target for goods produced in a nation, could fall by 15% in 2022 and 3% in 2023 as a result of sanctions that wipe out decades of growth. A contraction of that magnitude would be about twice as strong as the Russian recession during the global financial crisis of 2008.

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“Further escalation of the war could lead to more boycotts of Russian energy, which would drastically impair Russia’s ability to import goods and services, exacerbating the recession,” the IIF said in an analyst note last month.

At the same time, Goldman Sachs predicted that the economy could shrink by 10% this year – after previously predicting growth of around 2% – while Capital Economics predicts a decline of 12%. Barclays economists, including Brahim Razgallah, said in an analyst note that the Russian economy could fall by as much as 12.4% by 2022.

Russian President Vladimir Putin attends a meeting with young award-winning cultural professionals via video conference in Moscow, Russia, on Friday, March 25, 2022. (Mikhail Klimentyev, Sputnik, Kremlin Pool photo via AP, file / AP photos)

“Due to the current geopolitical situation, we assume that the sanctions will be long lasting,” they wrote.

Western allies targeted Russia with severe economic sanctions following the invasion of Ukraine on February 24, including cutting off a significant portion of Russia’s central bank by preventing it from selling dollars, euros and other foreign currencies in its reserve stock of about $ 630 billion; blocking certain financial institutions from the Swift messaging system for international payments; and sanction hundreds of Russian lawmakers and elites who have close ties to President Vladimir Putin.

On top of that, hundreds of Western companies – including Coca-Cola, McDonald’s and Goldman Sachs – moved to sever ties with Moscow after the invasion began as they faced intense pressure from investors and consumers. The pace intensified as the tireless fighting in Ukraine gave rise to a massive humanitarian crisis.

Putin has warned that Russia is facing rising unemployment and inflation as it confronts the international sanctions it has described as an “economic blitzkrieg”.

Moscow is also on the brink of a historic debt default, according to Moody’s, because it tried to service its dollar-denominated bonds in rubles. This would be the first time Russia has defaulted on foreign debt since the 1917 Bolshevik revolution.

Pedestrians pass the entrance to a branch of Uniastrum Bank LLC, part of the Bank of Cyprus Group, in Moscow, Russia, on Tuesday, March 19, 2013. An agreement on double tax avoidance and low tax rates has made Cyprus the preferred channel for Russian films (Andrey Rudakov / Bloomberg via Getty Images / Getty Images)

Russia made a payment due on April 4 on two government bonds in rubles instead of the dollars it agreed to pay under the terms of the securities.

Russia “can therefore be considered a default under Moody’s definition if it is not cured by May 4, which is the end of the repayment period,” Moody’s said on Thursday. “The bond contracts have no provisions for repayment in any currency other than dollars.”

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Finance Minister Anton Siluanov told Russian state media earlier this month that if the Kremlin is forced to default on its debt, it will take legal action.

“We will sue because we took all necessary actions so that investors would receive their payments,” Siluanov told the pro-Kremlin Izvestia newspaper. “We will show the court proof of our payments to confirm our efforts to pay in rubles, just as we did in foreign currency. It will not be a simple process.”

It is unclear who Russia will sue.

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