Russia has privately warned of deep and lasting economic damage

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

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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 statements. Bloomberg saw a copy of the report prepared for a closed-door meeting of senior officials on August 30. People familiar with the discussions confirmed its authenticity.

Two of the three scenarios in the report show that the contraction will accelerate next year, with the economy not returning to pre-war levels until the end of the decade or later. The “inertia” scenario sees the economy bottoming out next year at 8.3% below its 2021 level, while the “stress” scenario puts the bottom in 2024 at 11.9% below last year’s level.

All scenarios predict an increase in sanctions pressure, with more countries likely to join. Europe’s sharp withdrawal from Russian oil and gas could also hit the Kremlin’s ability to supply its own market, the report said.

Apart from the restrictions themselves, which cover around a quarter of imports and exports, the report describes how Russia now faces a “blockade” that “has affected virtually all forms of transport”, further disrupting the country’s economy. Technological and financial constraints add to the pressure. The report estimates that as many as 200,000 IT professionals could leave the country by 2025, the first official forecast of the expanding brain drain.

Publicly, officials have said the hit from sanctions is smaller than feared, with a contraction likely to be less than 3 percent this year and even less in 2023. Outside economists also adjusted the outlook for this year, rejecting initial forecasts of deep recession as the economy holds up better than expected.

Exporting

The document calls for a range of measures to support the economy and further ease 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.

Asked about the Bloomberg report early Tuesday in Vladivostok, Economy Minister Maxim Reshetnikov called the forecasts “analytical estimates that we used to calculate what will happen if we don’t resist, do nothing,” according to TASS.

What Bloomberg Economics Says…

“With reduced access to Western technology, a wave of divestitures to foreign corporations and impending demographic headwinds, the country’s potential growth is expected to shrink to 0.5%-1.0% over the next decade. It will then shrink further, to just above zero by 2050. Russia will also be increasingly vulnerable to a decline in 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 output in a number of export-oriented sectors,” from oil and gas to metals, chemicals and wood products. Although some recovery is possible later, “these sectors will cease to be drivers of the economy.”

No, Yale – sanctions did not cause a collapse in Russia

A complete shutdown of gas supplies 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 markets even in the medium term.

A hit in the oil sector

As a result, production would have to be cut, threatening the Kremlin’s goals of expanding domestic 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 freeze imports of Russian petroleum products – about 55% of exports went there last year – could trigger a sharp cut in output, leaving the domestic market also short of fuel.

Metals producers are losing $5.7 billion a year from the restrictions, the report said.

If the global economy falls into recession, the report warns, Russia’s exports could be cut even further as it becomes a “variable supplier” to world markets, with demand for its products first disappearing. This could cause the ruble to fall and inflation to spike.

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

“Critical Import”

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

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

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

The report warned that the sanctions would also force the government to revise a set of development goals that Putin had set before the war, including those to increase population growth and life expectancy.

On a sectoral basis, the report details the scope of the sanctions’ impact:

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

  • Aviation: 95% of passenger volume is carried by foreign aircraft and the lack of access to imported spare parts could lead to a shrinking fleet as they retire

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

  • Pharmaceuticals: About 80% of local production relies on imported raw materials

  • Transport: EU restrictions have tripled the cost of land transport

  • Communications and IT: Restrictions on SIM cards could leave Russia with a shortage of SIM cards by 2025, while its telecoms sector could be five years behind world leaders in 2022.

(Updates with comments from the Minister of Economy in the eighth paragraph.)

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