While many analysts and observers expected Russia’s economy to collapse under the weight of the Ukraine war and a spate of Western sanctions, the country actually appeared surprisingly resilient going into 2022.
The head of Russia’s central bank said in December that Russia’s GDP would shrink by just 3% in 2022, while President Vladimir Putin predicted a 2.5% contraction.
“The Russian economy survived 2022,” economist Janis Kluge of the Science and Politics Foundation (SWP) told the Moscow Times.
“But we can’t say it’s weathered the sanctions yet because they’re still unfolding.”
Economists like Kluge warn that behind the seemingly positive year-end statistics are many signs of darker times.
And even the GDP figures are not as rosy as they might seem.
The inclusion of sanction-free January and February in GDP numbers creates a misleading picture of Russia’s real economic losses – and economists point out that Russia’s war-related economic losses are significantly higher because – before the invasion – the economy was expected to would grow by about 3.5 percent.
Sophia Sandurskaya / Moskva News Agency
Even a 3% decline is a “colossal recession, considering all global economies are projected to grow 3% or 4% after the coronavirus pandemic,” economist Oleg Itskhoki said in a recent YouTube stream hosted by the Russian journalist Yevgenia Albats.
According to Kluge, before the war, Russia’s economy was expected to grow by up to 4% between February and December. Instead, it’s down 6% over that time.
That means Western sanctions “essentially shrank the Russian economy by 10%,” he said.
In comparison, Russia’s GDP contracted by 7.8% during the 2009 Great Depression.
Despite the huge economic losses, experts are divided on how Russia managed to avoid an even bigger economic contraction.
Many doomsday predictions for the Russian economy were based on the assumption that the country would face a banking crisis, according to economists interviewed by media outlet Meduza. However, there was no banking crisis.
The Russian economy was also boosted by record earnings from energy analysts as commodity prices, including oil and gas, soared after the invasion.
According to the Finland-based Energy and Clean Air Research Center, Russia took in about $158 billion in energy exports in the first six months after invading Ukraine.
Denis Voronin / Moskva News Agency
In March and April, Russia even set new records in oil and gas revenues.
But the West is increasingly focused on severing that lifeline for Russia — and the European Union last month banned sea shipments of Russian crude and introduced an oil price cap.
Russia’s maritime oil exports fell 22% in December following the imposition of the embargo, according to figures from commodities data firm Kpler, cited by the Wall Street Journal.
“Russia is going into the new year without this big cushion, without the European market for gas exports, with much lower oil prices and lower oil export volumes,” Kruge said.
“It’s going to be a big problem.”
Falling gas and oil exports are likely to weaken the Russian currency – and the ruble has lost 13% against the US dollar since the price cap was introduced.
According to Kruge, this trend should continue.
“The ruble will weaken and that will lead to even more inflation in Russia. This is also becoming a political problem,” said the SWP economist.
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Annual inflation in Russia is expected to reach 12% over the past year.
Other consequences of the war, including the exodus of over 1,000 foreign companies and Western sanctions against exports to Russia, are also likely to have a slower impact.
“Many companies will lose access to Western technology, software and machines,” said economist Kruge. “It’s like a very slow erosion of productivity.”
Still, different sectors of the Russian economy have performed very differently, with some suffering particularly badly – while others have thrived.
One of the worst performers was auto manufacturing, with Russian auto sales expected to close 2022 at 660,000 units — down 60% year-on-year.
On the other hand, 2022 was a good year for agriculture, which is expected to record overall growth of at least 4%.
Russia’s agricultural sector in 2022 will be “the brightest spot of the rotting Russian economy,” said Andrey Sizov, managing director of SovEcon, an agricultural research firm focused on the Black Sea region.
The top result for Russian farmers was helped by near-perfect weather conditions, but Sizov warned that 2022 was likely to be an exception.
“Over three to five years, if nothing changes, we will see stagnation in the crop production sector and possibly even a drop in production,” Sizov told the Moscow Times.
Sophia Sandurskaya / Moskva News Agency
This slow and steady decline over the coming years is likely to be replicated to varying degrees throughout the Russian economy.
Economist Itskhoki said Russia’s economy will contract by up to 5% in 2023, while others believe the contraction will be even larger.
Alfa Bank chief economist Natalia Orlova said it will shrink by 6.5% due to falling consumer demand, lower investment and the loss of export potential.
But political uncertainty and the unpredictability of military events in Ukraine mean all forecasts are subject to change at any time. .
“The economy is unlikely to be the main source of news in 2023,” Itskhoki said earlier this month.
“It is hard to imagine that the war could go on for another 10 months without causing disaster.”