Russia’s economy contracted sharply in the second quarter as the country suffered from the economic fallout from its war in Ukraine, in what experts say marks the beginning of a long-term downturn.
The economy shrank by 4 percent from April to June from a year earlier, Russia’s statistics office said Friday. It is the first quarterly gross domestic product report to fully reflect the change in the economy since the invasion of Ukraine in February. It was a sharp turnaround from the first quarter, when the economy grew by 3.5 percent.
Western sanctions, cutting off Russia from about half of its emergency reserve of $600 billion in foreign exchange and gold reserves, severely restricted its dealings with Russian banks and cut off access to US technology, forcing hundreds of major Western companies to withdraw from the country. the country .
But even as imports to Russia dried up and financial transactions were blocked, forcing the country to default on its external debt, the Russian economy proved more resilient than some economists initially expected, and the GDP drop reported Friday was not as serious as some had expected this in part because the country’s treasury matched energy revenues as world prices rose.
However, analysts say the economic toll will become heavier as Western countries increasingly turn away from Russian oil and gas, crucial sources of export revenue.
“We thought it was going to be a deep dive this year and even after that,” Laura Solanko, senior adviser at the Bank of Finland’s Institute for Economies in Transition, said of the Russian economy. Instead, there is a milder economic decline, but it will continue next year, putting the economy into a less deep recession for two years, she said.
Russia, a $1.5 trillion economy before the war began, moved quickly in the days following the invasion to soften the impact of sanctions. The central bank more than doubled interest rates to 20 percent, severely curtailed the flow of money out of the country, halted stock trading on the Moscow stock exchange and relaxed banking regulations so that lending did not stop. The government also increased social spending to support households and loans to businesses hit by sanctions.
The measures have mitigated some of the impact of the sanctions. And as the ruble recovered, Russian finances benefited from high oil prices.
“Russia weathered the first sanctions shock” and “has been relatively resilient so far,” said Dmitry Dolgin, chief economist for Russia at Dutch bank ING. But, he noted, unless Russia manages to diversify its trade and finances, the economy will be weaker in the long run.
Retail sales fell about 10 percent, the statistics agency said, while wholesale activity fell 15 percent.
Michael S. Bernstam, a research fellow at the Hoover Institution at Stanford University, said the data released Friday was consistent with other reports from Russia. He also expects the economy to deteriorate in the second half of this year, and then again in 2023.
As the war continues, many countries and companies will strive to permanently end relations with Russia and its domestic companies. Businesses will struggle to get replacement parts for Western-made machines and software will need updates. Russian companies will have to rearrange their supply chains as imports increase.
The outlook for the Russian energy industry, which is central to the country’s economy, is deteriorating. The United States and Britain have already banned Russian oil imports, and the country’s oil output will fall further early next year when the full impact of a European Union import ban goes into effect. Russia should find customers for about 2.3 million barrels of crude and oil products per day, which is about 20 percent of average production in 2022, according to the International Energy Agency.
So far, countries like India, China and Turkey have caught some of the lost trade from Europe and the United States, but it’s unclear how many new buyers can be found.
Reliance on Russian natural gas is also reduced. In the last week of June, total European Union gas imports from Russia were 65 percent lower than a year earlier, according to a report by the European Central Bank. Some of these declines have been forced on Europe because Russia has cut off its gas supplies. But European countries have stepped up their efforts to find alternative sources and, for example, are rapidly developing infrastructure for additional liquefied natural gas imports.
The economy will suffer as the “depletion of imported investment stocks, the enforcement of the EU oil embargo, increased financial pressure on households and their increased dependence on the state” take their toll, while the power of the plant bank and the government to provide monetary and fiscal support is limited, wrote Mr Dolgin of ING.
Shortly after the invasion of Ukraine, inflation rose in Russia as households searched for goods they expected to become scarce. In July inflation rose above 15 percent, according to the Russian central bank. However, there are already signs that inflation is slowing, and as a result the central bank has cut interest rates to 8 percent, lower than before the war.
Last month, the bank said business activity had not slowed down as much as expected, but the economic environment “remains challenging and continues to limit economic activity significantly”.
The bank forecast that the economy will shrink by 4 to 6 percent this year, much less than it had expected just after the outbreak of the war. That figure of 6 percent also corresponds with the latest update from the International Monetary Fund.
The economy will contract more sharply next year and will not grow again until 2025, the central bank said Friday. The bank predicted that inflation would be 12 to 15 percent by the end of the year.
Supply chain issues will pose challenges in the coming months as companies curtailed by sanctions seek to adapt their supply chains to replenish inventories of finished and raw goods.
“I don’t think the Russian economy is doing well at the moment,” Ms Solanko said. But the idea that sanctions and the exit of companies from Russia would quickly collapse the economy was never realistic. “Economies just don’t disappear,” she said.