Russia’s economy is collapsing, ruined by Putin’s war in Ukraine

  • Russia’s economy is on the verge of shrinking 15% by 2022, according to some estimates, as the war in Ukraine and Western sanctions put enormous pressure on the country.
  • The country is almost excluded from global financing and imports and exports are expected to plunge while 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.

Russia’s economy almost imploded in the 1990s. It shrank 7% a year on average for seven years in a row.

The experience hangs in the heads of Russians who went through it. In fact, President Vladimir Putin has historically seen himself as Russia’s savior, delivering a stable economy and restoring national pride.

Now, however, Putin’s brutal war in Ukraine stands 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 from 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 stock of global foreign exchange reserves.

Western companies, from McDonald’s to Coca-Cola to Shell, “self-sanction” and abruptly withdraw from the country. The ruble, Russia’s currency, has been on a wild ride. Inflation is up.

Russia’s economy will shrink dramatically

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

Goldman Sachs believes the economy will shrink 10% this year, after previously expecting it to grow by 2%. Capital Economics forecasts a decline of 12%.

“The impact on Russia will come from virtually every sector,” Liam Peach, emerging markets economist at Capital Economics, told Insider. The consulting firm expects unemployment to rise from 4.1% to 8% by the end of 2022.

Peach said Western governments’ move to cut certain Russian banks out of Swift, a crucial global payment messaging system, would hit non-energy exports hard. Meanwhile, the United States has banned imports of Russian oil and Britain is following suit.

Goldman Sachs believes that sanctions and self-sanctions from Western companies will cause imports to fall 20% this year and exports to fall 10%.

Inflation is set to rise to 20%

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

A weaker ruble will push up the price of imports, while sanctions and the withdrawal of Western companies are likely to reduce the supply of goods and services.

“The shock on the supply side will be absolutely awful,” Madina Khrustaleva, Russia analyst at consulting firm TS Lombard, told Insider.

Read more: Moscow insiders describe panic, frustration and shame as Russia is cut off from the global economy

The central bank has raised interest rates to 20% to try to curb withdrawals from Russian banks. But penalty interest rates must cause a sharp drop in borrowing 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 bigger role and raw material production will become even more important. She said it would be like the 1990s the other way around.

“Back in the 1990s, we understood that this structural shift would lead to this increase in productivity,” Khrustaleva said. “Now you have the 90s, but go the other way. It’s a huge loss of productivity.”

Raw materials and a rising ruble can relieve the pain

The only ray of hope for Russia 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 that Russia should still have a large trade surplus by 2022, which will bring foreign currency into the country and reduce the pain of the financial system somewhat.

Meanwhile, the ruble has risen sharply in recent days as peace talks intensify. Investors hope an end to the war could at least partially reintegrate Russia into the world economy.

But things can also get worse. Peach, of Capital Economics, said a move by the EU to curb energy imports would have a huge impact and could trigger “a wave of corporate defaults.”

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

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