Russia privately warns of deep and prolonged economic damage

(Bloomberg) — Russia could face a longer and deeper recession as the impact of U.S. and European sanctions spreads, undermining sectors the country has relied on for years to fuel its economy, according to an internal report prepared for the government.

Most Read by Bloomberg

The document, the result of months of work by officials and experts trying to assess the true impact of Russia’s economic isolation due to President Vladimir Putin’s invasion of Ukraine, paints a far more dire picture than officials usually do in their upbeat public announcements. their. Bloomberg saw a copy of the report, which was prepared for a closed-door meeting of top officials on Aug. 30. People familiar with the discussions confirmed its authenticity.

Two of the three scenarios in the report show the contraction accelerating next year, with the economy returning to pre-war levels only by the end of the decade or later. The “inert” scenario sees the economy bottoming out next year at 8.3% below the 2021 level, while the “stress” scenario puts the low in 2024 at 11.9% from last year’s level.

All scenarios see sanctions pressure intensifying, with more countries likely to join. Europe’s sharp turn away from Russian oil and gas could also hurt the Kremlin’s ability to supply its own market, the report said.

Beyond the restrictions themselves, which cover about a quarter of imports and exports, the report details how Russia now faces a “blockade” that “has affected almost all forms of transport,” further cutting off the country’s economy. Technological and financial constraints increase the pressure. The report estimates that up to 200,000 IT professionals may leave the country by 2025, the first official prediction of a widening brain drain.

Publicly, officials say the hit from the sanctions has been less than feared, with the contraction likely to be less than 3% this year and even less in 2023. Outside economists have also adjusted the outlook for this year, reversing initial forecasts of a deep recession as the economy held up better than expected.

Export drop

The document calls for a series of measures to support the economy and further reduce the impact of restrictions, so that the economy can recover to pre-war levels in 2024 and grow steadily thereafter. But the steps include many of the same measures to boost investment that the government has touted over the past decade, when growth has largely stagnated even without sanctions.

The government press service referred a question about the report to the finance ministry, which did not immediately respond to a request for comment.

What Bloomberg Economics Says…

“With reduced access to Western technologies, a wave of disinvestment by foreign companies and demographic headwinds ahead, the country’s potential growth is set to shrink to 0.5%-1.0% over the next decade. It will then shrink even further, to just above zero by 2050. Russia will also be increasingly vulnerable to falling global commodity prices, as international reserves no longer provide a buffer.” -Alexander Isakov, Russian economist

Over the next year or two, the report warns of “reduced production volumes in a range of export-oriented sectors”, from oil and gas to metals, chemicals and wood products. While some recovery is possible later, “these sectors will cease to be the drivers of the economy.”

No, Yale – Sanctions have not caused a collapse in Russia

A complete gas cut to Europe, Russia’s main export market, could cost up to 400 billion rubles ($6.6 billion) a year in lost tax revenue, according to the report. It will not be possible to fully compensate for lost sales with new export purchases even in the medium term.

Strike in the oil sector

As a result, production should be cut, threatening the Kremlin’s goals to expand domestic natural gas supplies, the report said. The lack of technology needed for LNG plants is “critical” and could hamper efforts to build new ones.

Europe’s plans to halt imports of Russian oil products — about 55% of exports went there last year — could trigger sharp output cuts leaving the domestic market without fuel as well.

Metals producers lose $5.7 billion a year from the restrictions, the report says.

If the global economy slips into recession, the report warns, Russia could see exports decline further as it becomes the “swing supplier” in global markets, with demand for its products disappearing first. This could cause the ruble to plunge and inflation to rise.

On the import side, “the main short-term risk is the suspension of production due to a lack of imported raw materials and components.” In the long term, the inability to repair imported equipment could permanently limit growth, the report said.

“Critical Imports”

“There are simply no alternative suppliers for some critical imports,” it said.

Even in the agricultural sector, where the Kremlin has touted its efforts to replace foreign supplies, reliance on key inputs could force Russians to cut back on food consumption as supplies dwindle, the report said.

Restrictions on access to Western technology may push Russia a generation or two behind current standards, forcing it to rely on less advanced alternatives from China and Southeast Asia.

The report warns that the sanctions will also force the government to revise a number of development goals set by Putin before the war, including those to boost population growth and life expectancy.

On a sector-by-sector basis, the report details the scope of the sanctions hit:

  • Agriculture: 99% of poultry production and 30% of Holstein dairy cattle production depends on imports. Seeds for staples such as sugar beet and potatoes are also mostly imported from outside the country, as are fish feed and amino acids.

  • Aviation: 95% of passenger volume is carried by foreign-made planes and lack of access to imported spare parts could lead to fleet shrinkage as they retire

  • Machine building: only 30% of machine tools are Russian-made and the local industry does not have the capacity to meet the growing demand

  • Pharmaceutical products: About 80% of domestic production is based on imported raw materials

  • Transport: EU restrictions have tripled the cost of road shipments

  • Communications and IT: SIM card restrictions could slow Russia down by 2025, while its telecoms sector could fall five years behind world leaders in 2022.

(Updates with economist commentary from the ninth paragraph)

Most Read by Bloomberg Businessweek

©2022 Bloomberg LP

Leave a Reply

Your email address will not be published. Required fields are marked *