Higher energy prices have helped cushion Russia’s economy, but the country faces a big loss of revenue over the coming decade
PHOTO: ANDREY RUDAKOV/BLOOMBERG NEWS
By Paul
Hannon
Updated Oct. 28, 2022 9:06 am ET
Russia is set for the
deepest recession of any large economy this year, according to new forecasts
from its central bank—and economists forecast a gloomy future as the
windfall from high energy prices fades, sanctions tighten and the
country struggles to replace Europe as the main buyer of its oil and gas.
The
Russian economy is suffering from the impact of sanctions and the withdrawal
of Western businesses in the wake of the invasion of Ukraine in
February. While Russia has benefited from soaring energy prices this year,
economists expect revenue to fall sharply as the
global economy slows and the West finds substitutes for Russian
energy.
The central bank’s forecast of a
drop in gross domestic product of between 3% and 3.5% this year is less than it
had expected soon after the start of the conflict.
“The decline in GDP will be less
significant than anticipated,” said Bank of Russia head Elvira Nabiullina.
However, the expected
contraction would likely be the largest recorded by a member of the Group of 20
largest economies.
Immediately
after the invasion, the bank expected the economy to contract between 8% and
10% this year, and by as much as 3% next year. It now expects GDP to contract
between 1% and 4% next year.
Before
Russia’s invasion
of Ukraine, the central bank expected the economy to grow as much as 3% in
2022. That means the war has cost the country more than 7% of its GDP in lost
output this year alone.
The
Bank of Russia left its key interest rate unchanged for the first meeting since
March, which was followed by six straight rate cuts to 7.5% from 20% as policy
makers succeeded in stabilizing the ruble and the financial system in the wake
of Western sanctions.
The
central bank warned that the economy could suffer a larger drop in output next
year if Russia faces tougher sanctions, or weaker
demand from a slowing global economy. The European Union aims to levy new
sanctions on shipping Russian crude worldwide.
“The
difficulties are related to the economy adjusting to the kind of restrictions
that had previously been introduced,” said Ms. Nabiullina. “This adaptation is
taking place better than our expectations. But it doesn’t mean that is going to
be easy further on because of course external pressure remains. It may become
stronger, we’re very well aware of it.”
The
bank said growth could also suffer as a result of the government’s September decision
to recruit
an additional 222,000 troops.
“Later
on it might start to have a pro-inflationary impact due to a shortage of some
specialist skills,” said Ms. Nabiullina.
Sanctions and the
voluntary withdrawal of Western businesses have hit some parts of the economy
hard. According to figures released Wednesday by the Federal State Statistics
Service, car production in September was less than half of its level a year
earlier.
But
the economy has been cushioned by a surge in revenue from energy exports. The
Kremlin’s steady reduction in supplies of natural gas to Europe to around 20%
of their year-earlier levels in September has boosted Russian earnings by
sending world energy prices sharply higher.
A
new study by research institute Bruegel estimates that higher prices
have boosted Russia’s revenue from energy exports by $120 billion in the first
nine months of the year. The economists estimate that Russia will record a
surplus in its income from the rest of the world over its expenditures there of
$240 billion this year, falling to $100 billion in 2023.
However,
the bounce in energy revenue is unlikely to last. According to the
International Energy Agency, Russia will suffer a permanent decline in energy
production as a result of its invasion of Ukraine and Europe’s subsequent loss
of trust in the country.
“Russian
fossil fuel exports never return—in any of our scenarios—to the levels seen in
2021,” the IEA said in a report Thursday.
The
research body said Russia’s share of global exports of oil and gas could halve
by 2030, and that it is unlikely that China will replace lost European markets
for natural gas given its ambitions to cut carbon emissions.
The
loss of Russian supplies will have an impact on European economies, with many
economists expecting output to fall in the final months of this year as cold
weather raises energy consumption.
But
figures released Friday indicate that Europe’s largest economies are proving
more resilient to higher energy costs than had been expected. In particular,
Germany’s statistics agency said Europe’s largest economy continued
to grow in the three months through September despite production cuts
in some energy-intensive manufacturing.
“When
you’re looking at the global outlook and the European outlook, we see a lower
growth, but we are not seeing deep recessions like in Russia,” said Alfred
Kammer, head of the International Monetary Fund’s European department.
Write to Paul
Hannon at paul.hannon@wsj.com
https://www.wsj.com/articles/russian-economy-expected-to-shrink-under-weight-of-sanctions-11666956390
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