The Russian economy will shrink by 35 percent in the second quarter, JP Morgan estimates. The investment bank Goldman Sachs also lowered its forecasts. According to the forecasts of the Polish Economic Institute, this year Russia’s gross domestic product will decline by about 15-20 percent.
The director of the Polish Economic Institute, Piotr Arak, emphasized that the sanctions imposed by the West to date will cause a snowball effect in the Russian economy. – The total collapse of the ruble exchange rate will limit profitable imports, shortages of products will inhibit production, inflation will gallop, and Russia will be able to defend itself only with the use of domestic economic policy tools, for example, reprinting the ruble. The panicked withdrawal of cash has already led to a collapse in the liquidity of the banking sector. Hyperinflation will rewind this spiral, the ruble will continue to weaken, and the economy will be in a long-term collapse, pointed out the head of PIE.
Sanctions against Russia
According to the Institute’s economists, the sanctions imposed will cause Russia’s GDP to decline this year by about 15-20 percent. They point out that this will make Russia poorer than not only in all EU countries, but also in some South American countries, such as Uruguay.
“Even before the armed invasion of Ukraine, Russia was a relatively poorly prosperous country – its GDP per capita was only 51% of Germany’s wealth, which placed Russia between Chile and Greece. its prosperity was comparable to the Czech Republic, after the sanctions it will be the level of Latvia “- pointed out PIE.
JPMorgan and Goldman Sachs on the Russian economy
The Goldman Sachs investment bank lowered its forecast for Russia’s gross domestic product for this year. The bank expects the Russian economy to shrink by 7% in 2022, while an increase of 2% was previously forecast. It is estimated that last year Russia’s economy grew by 4.5% after contracting by almost 3% in 2020, the worst pandemic year for the world economy.
Russia’s Gross Domestic Product will drop by 35 percent. in the second quarter and by 7 percent. throughout 2022, which is a dramatic slowdown comparable to the financial crises of 1998 and 2008 – forecast JPMorgan analysts.
“Sanctions and decisions by foreign companies to suspend or suspend Russia’s operations have led to stagnation in international trade, reduced production and supply chain disruptions,” wrote JPMorgan strategist Anatoliy Shal in a note to customers entitled “Russia: Sudden Detention”.
“The shock implies a lower potential output accompanied by a price spike. The credit crunch will increase the pain, although there are signs that the bank run is weakening somewhat,” he added.
Consequences of Western Sanctions for the Russian Economy
Economists argue that the sanctions imposed by the West will lead to the collapse of the entire financial system of Russia and the slowing down of economic activity in Russia’s largest agglomerations – as a result, they will affect the entire country. The sanctions will hit the two largest economic regions the hardest – Moscow, which is responsible for 38.5 percent. exports of the whole country and St. Petersburg generating 6.4 percent. The remaining regions of the country have less than 4%. share in domestic exports.
“With the impact on major agglomerations, the most important sectors of the Russian economy – industry, trade and real estate – will collapse. The ban on the transport of modern technologies and the suspension of imports of Russian products will directly hit the industries that make up the largest part of GDP: industrial processing (accounting for 14.8 percent GDP) and mining (9.8%). The financial crisis and the economic downturn mean a recession in trade (13.1%) and the real estate market (10.5%). It will also be a result of the withdrawal of foreign companies from Russia “- forecasts Jakub Rybacki, deputy manager of the macroeconomics team at PIE.
According to the Institute, the economic crisis in Russia will also spread to industries not directly covered by sanctions, such as the production of metals, food, wood and plastic. “This will be the effect of a shortage of machinery. Due to the low-quality of domestic products, most of the demand for machinery in the Russian industry is satisfied by imports, mainly from EU countries. The Russian industry repairs and maintains them. Sanctions on the export of technology and machinery, and above all difficulties in cooperation with Western companies, they will cause partial production downtime and block the development of the industry “- explained.
Russian billionaires are also starting to notice the impact of the sanctions on the Russian economy. Associated with the Kremlin the oligarch Oleg Deripaska said that Russia was facing a very difficult economic crisis. The Russian businessman, quoted by the Interfax agency, added that due to the “events in Ukraine” the crisis will last at least three years.
Standard & Poor’s downgraded Russia’s long-term foreign currency debt rating to CCC- from BB + earlier on Thursday. The previous downgrade of Russia by S&P took place on February 26. The agency then lowered the country’s rating to BB +, i.e. to the junk level.
On Wednesday, Moody’s downgraded Russia’s ratings to B3 from Baa3, leaving them on the watch list for a downgrade. In turn, Fitch downgraded Russia’s long-term rating to B from BBB, placing the rating on the negative watch list (RWN).
The agencies said the ratings were downgraded as a result of sanctions imposed on Russia in response to its invasion of Ukraine.
The example of Iran
PIE economists explain that the analysis of the effect of the sanctions on Russia is based on a similar experience of Iran in 2012, which was subject to a similar package of restrictions. It was recalled that these included a ban on the purchase of oil and chemicals from that country, a freezing of Iranian assets and a cut-off from SWIFT.
“The restrictions immediately cut Iran’s GDP by almost 10 percent. The White House analysis office estimates the total impact of the damage on Iran’s GDP at 20 percent. Other analyzes indicate that the sanctions reduced the potential economic growth rate by about 1-2 percentage points. and the social pressure exerted by the sanctions lasted about 6 years. In the case of Russia, the initial impact of sanctions may be even twice as strong as in Iran due to more permanent economic ties with the West, “PIE economists believe.
Main photo source: EPA / YURI KOCHETKOV