Using data from sources including the IMF, the World Bank, the International Energy Agency and the Central Bank of Russia (CBR), a new study by experts and academics at the KSE Institute with links to the Yermak-McFaul Expert Group on Sanctions reveals that sanctions are affecting Russia and projects that its economy will deteriorate over the coming months.
Despite high oil and gas prices – underpinning the strong current account surplus which helped to stabilise the RUB, control inflation and allow the Central Bank of Russia to cut rates – the Russian economy still contracted in Q2 2022, down by 4.9% YoY, according to the Russian statistics agency Rosstat.
This weak performance compares to strong growth among other oil and gas exporters, such as the 11.8%YoY expansion recorded by Saudi Arabia in Q2 2022. The head of Sberbank stated that it might take ten years to restore Russia’s GDP to the level of 2021.
Putin’s Russia had a balance of payments crisis in 2008, 2014-15 and 2020 when oil and gas revenues fell sharply. In 2023, as the European oil embargo is implemented, the report projects a 40% reduction in Russia’s oil and gas revenues.
With the RUB under pressure, Russia’s ability to wage war on Ukraine will be weakened. And if Europe stops buying Russian gas – possible immediately, the KSE institute argue – Russia’s oil and gas revenue next year would fall to a critically low level.
The Central Bank of Russia reported that the average selling price for Russian oil in Q2 was slightly under $80/bbl, when the average price was $113/bbl, confirming the discount on Russian crude at around the previously estimated $35/bbl. This implies a Q2 loss of around $20 bn on oil earnings due to sanctions.
The study, by the KSE Institute group on sanctions, uses data from the Central Bank of Russia to show evidence of a bank run inside Russia in the first half of 2022, as panicking account holders withdrew $21.6 bn-worth of deposits to hold as cash, removing this liquidity from the banks.
To finance an over 2.5-time increase in the defense budget, import substitution and other measures to contract sanctions, the Kremlin had to halt $26bn worth of planned budget programs for 2023-2025. This comes on top of Budget cuts that are already in place.
In April, there was a nearly one-third reduction in spending on health provisions for the Russian people.
The effects felt by ordinary Russian citizens as a result of Vladimir Putin’s decision to invade Ukraine also include a collapse in real wages and a crippling “brain drain”, for example, the Ministry for internal affairs stated that due to emigration, just the IT industry lacks about 170K workers as educated Russians flee for high-paid jobs in the West.
It can also be revealed that Vladimir Putin is trying to cover up the extent of the crisis amid widespread fears of civil unrest. In April, Russian banks were ordered not to disclose interim and annual financial statements. Last month, the Russian president also signed a law that allows the Kremlin to hide information regarding the value and structure of its dwindling international reserves. Such data is now classified as a state secret.
The Kyiv School of Economics said told LondonLovesBusiness.com of the impact that sanctions are having on Russia’s economy.
They said, “Once oil and gas revenues fall below a critical level – which seems to be about $150 bn per annum – then external balance will require either the extensive use of international reserves and/or a major adjustment in the RUB exchange rate.
“In practice, we think the Russian authorities would then face a difficult choice between letting the RUB weaken and accepting a reacceleration of inflation, which will squeeze real incomes, or implementing a sharp tightening in policy, as seen this spring, to weaken outflows and support the RUB, which will slow the economy.
“In either scenario, the Russian economy will be seriously impaired – with an impact similar to the levels of the 2009, 2014, and 2019 crises – weakening Putin’s ability to continue waging his war of imperial aggression against Ukraine.
“Our detailed bottom-up projections of Russian oil and gas revenues, which are aligned with the estimates of reputable international agencies such as the IEA, suggest that next year Russia will experience such a drop in oil and gas revenues, into a sensitive zone, as the European oil embargo comes into force, with revenues falling by over 40% from around $330bn in 2022 to $190 bn in 2023 in our base case, and running at around the critical $150 bn a year pace by the end of 2023.”
Speaking to us they said that as a direct result of the sanctions almost 4 million extra people are now unemployed in Russia.
The authors of the report said,“IMF forecasts unemployment in the Russian Federation (RF) to reach 9.3% in 2022, which would equal around 3.8 million of additional unemployed persons.
“According to estimates of the Russian Center for Strategic Research, by the end of 2022 there will be a significant increase in unemployment in 63% of regions in Russia, in 16 regions unemployment will increase relative to the average level for Jan-Mar 2022 by 2 or more times, in 53 regions – 1.5 times or more.
“The top 5 industries impacted by the number of expected jobs cut include – transport and logistics, automotive, wholesale and e-commerce, timber industry and wood products.”
Vladimir Putin is also trying desperately to cover up the true extent of Russia’s financial crisis from the Russian people.
Putin made it law that banks are no longer allowed to share any banking secrecy with “unfriendly countires.
The report continued, “The Russian banking sector is becoming increasingly non-transparent. In April 22, Russian banks were allowed not to disclose interim and annual financial statements, until September 22. Also, CBR won’t publish reports of banks until October 1, 2022, while the CBR has also stopped publishing the SPFS participant list. In addition, on May 1, Putin signed a law, forbidding banks to share banking secrecy with “unfriendly” countries.
“On July 14, Putin signed a law, allowing to hide information regarding the value and structure of international reserves (such data will be classified as a state secret). In addition, the document allows for the reorganization of banks subject to sanctions.
“Its purpose is to form a new legal entity with assets frozen as a result of sanctions. Which means RF authorities are indeed frightened of further reserves and asset freezes and are trying somehow to protect remaining reserves.
“So far CBR continues to publish high level weekly data on its reserves.”
What Putin and Moscow do not want the West to know is that the Russian economy has contracted by almost 10%
“Forecasts for Russian 2022 GDP growth on average are -9.5% reduction in 2022. At the beginning of the war, the estimates were higher and ranged up to 30-50% contraction, although these forecasts assumed a sharp contraction in Russian oil and gas export earnings.
“As the initial assumptions that the West would impose rapid and damaging sanctions on trade with Russia didn’t materialize, analysts in Russia and in the international organizations revised their forecasts of contraction to smaller figures.
“For instance, in June experts in the Russian central bank`s Macroeconomic survey improved their expectations from -9.2% to -7.5%, while both the IMF and the World Bank improved their 2022 forecasts in recent revisions, while downgrading their expectations for 2023.
“Interestingly, the mentioned reports estimate that Russian GDP will continue to decline in 2023 and will start recovering from 2024 only.
“According to S&P Global Market Intelligence, Russia’s economic recovery to the level of 2021 will take 10 years. The head of Sberbank also stated that it may take ten years to restore Russia’s GDP to the level of 2021.
“Investment activity continued to decline at an accelerating pace in May 2022, according to Russian Center for Macroeconomic Analysis and Short-term Forecasting (CAMAC).
“The corresponding index, which is a weighted average of the indices of production (excluding exports) and imports of investment equipment and vehicles, as well as supply (production and imports, excluding exports) of building materials, in May amounted to 91.9% of the average monthly level of pre-COVID 2019.
“On average for 2021, the index was equal to 109.5% of the level of 2019.
“Russia’s exports (mainly, energy exports) started shifting from Western markets to India, China, Turkey and other Asian markets that observed considerable growth of Russian supplies.”