London (CNN) When Russia began its full scale Invasion of Ukraine A year ago, the West retaliated in an unprecedented manner Obstacles To punish Moscow and put pressure on President Vladimir Putin. The aim: to deal an economic blow severe enough for Putin to reconsider his brutal war.
As a result, Russia’s economy weakened. But it also showed Amazing resilience. As Russia’s oil demand falls in Europe, Moscow deflected its barrels to Asia. The country’s central bank averted a currency crisis Aggressive capital controls and interest rate hikes. Military spending supported industry, while the struggle to adapt Western equipment and technology boosted investment.
“The Russian economy and governmental system have turned out to be much stronger than the West had believed.” Putin said in a speech to the Russian parliament tuesday
Yet cracks are beginning to appear, which will continue to widen over the next 12 months. EU – Spent More than $100 billion Great progress has been made in phasing out purchases – on Russian fossil fuels – by 2021. Volume, it’s dramatic Its dependency decreases Last year on Russian natural gas, it officially banned imports of Russian crude oil by sea in December. It implemented a similar ban on refined oil products this month.
Those activities Russian funds are already struggling to find replacement customers willing to pay higher prices. The government announced a budget deficit of about 1,761 billion rubles ($23.5 billion) in January. Costs rose 59% year-over-year, while revenue fell 35%. Deputy Prime Minister Alexander Novak announced that Russia would cut oil production by about 5% starting in March.
“The era of windfalls from the oil and gas market for Russia is over,” Janis Klug, an expert on Russia’s economy at the German Institute for International and Security Affairs, told CNN.
Meanwhile, the ruble has fallen to its weakest level against the US dollar since last April. Currency weakness has contributed to high inflation. And most businesses say they can’t conceive of growth now, given the high levels of economic uncertainty. A recent study by a Russian think tank.
This dynamic puts the country’s economy on the path of collapse. And They will force Putin to choose between increasing military spending and investing in social goods like housing and education.
“This year could really be the key test,” said Timothy Ash, a Timothy Ash fellow in the Russia and Eurasia Project at Chatham House, a think tank.
holding
In an attempt to bring Russia under its sway, the West has used its dominance over the International Financial System to reveal more. 11,300 barriers The country’s foreign reserves were $300 billion due to the invasion and freeze. At the same time, More than 1,000 companiesup to Bp (Bp) to do McDonald’s (MCD) And Starbucks (Sex)Many withdrew from the country or scaled back operations, citing opposition to the war and new logistical challenges.
According to the government’s preliminary estimate, Russia’s economic output shrank by 2.1% last year. But the success was less than the forecasters initially expected. When the sanctions were first imposed, some economists predicted a 10% contraction. or 15%.
One of the reasons for Russia’s unexpected seizure Push towards self-sufficiency following Putin’s annexation of Crimea from Ukraine in 2014. “Castle of Russia” Govt Increased domestic food production And policymakers forced banks to build up their reserves. It created “sustainability,” Ash said at Chatham House.
Rapid intervention by Russia’s central bank, which raised interest rates to 20% after the invasion and implemented currency controls to rein in the ruble, was also a stabilizing force. Factories were needed to increase the production of military goods and to replace goods imported from the West.
But the biggest support came from higher energy prices and the world’s continued thirst for oil and other commodities.
Russia, the world’s second-largest crude oil exporter, was able to divert barrels destined for Europe to countries like China and India. The European Union, which imported an average of 3.3 million barrels of Russian crude and oil products in 2021, was buying 2.3 million barrels per day as of November, according to the International Energy Agency (IEA).
“This is a problem of natural resources,” said former Russian finance minister Sergei Aleksandrenko. an event Last month, the Center for Strategic and International Studies hosted a think-tank. That means the economy is in decline, but “not a collapse,” he added.
Russia’s oil problem
In fact, Russia’s average monthly oil export revenue rose 24% last year to $18.1 billion, according to the IEA. Nevertheless, a repeat performance is unlikely, presenting increasingly tough decisions for Putin.
The price of Urals crude, Russia’s main blend, fell to an average of $49.50 in January after Europe’s oil embargo — as well as a A group of seven price ranges – came into force. By comparison, the global benchmark was $82. It suggests that customers prefer to visit India and China A small group of eager buyers negotiate huge discounts. Russia’s 2023 budget is based on Urals prices above $70 per barrel.
Finding new buyers for processed oil products subject to new restrictions and price caps will not be easy. China and India have their own networks of refineries and want to buy crude oil, noted Ben McWilliams, Bruegel’s energy consultant.
Meanwhile, gas exports to Europe have plummeted since Russia shut down its Nord Stream 1 pipeline.
Russia’s government relies on the oil and gas sector for 45% of its budget by 2021. As defense spending is planned to increase, lower revenues inevitably mean trade-offs. The spending plans for 2023, finalized in December, include spending cuts A category that includes housing and health care, as well as public infrastructure.
“Whatever energy resources are obtained, they will be spent on military needs,” said Gulnas Sharafudinova, executive director of the Russia Institute at King’s College London.
On the decline
The International Monetary Fund expects Russia’s economy to expand between 0.3% and 2.1% this year. next. However, any perspective on what is happening in Ukraine continues.
“Whether the economy contracts or expands in 2023 will be determined by developments in the war,” Tatiana Orlova, an economist at Oxford Economics, wrote in a note to clients on Tuesday. Labor shortages tied to military conscription and immigration pose a major risk, he noted.
The impact of Western sanctions is poised to become a crisis over time. Bloomberg Economics Assesses Putin’s War in Ukraine $190 billion cut Outside of Russia GDP in 2026 compared to the country’s pre-war trajectory.
Import-dependent sectors will be particularly affected. There are domestic car makers like AvtoVas which manufactures the iconic Ladas Struggled with scarcity Main components and materials.
Russia’s automotive industry has already weakened after such companies Volkswagen (VLKAF), Renault (RNLSY), Ford (F) And Nissan (NSANF) Stopped production and started selling their local assets last year. Chinese companies have increased their presence, part of a broader trend. Even so, sales of new cars fell 63% year-on-year in January, according to the Association of European Businesses.
Across all sectors, companies struggle to plan for the future. A November survey of more than 1,000 Russian businesses by the Stolypin Institute of Economic Growth found that nearly half plan to maintain production over the next year or two and are not considering growth. The group said this contributed to a higher risk of “prolonged stagnation of the Russian economy”.
According to Sharafudinova of King’s College London, given Putin’s ideological commitment to subjugating Ukraine, he is unlikely to back down. But his war chest is “inevitably, likely to decrease,” he added.
Prioritizing military spending would come at a social cost, with a “slow and creeping” erosion of living standards, he added.
“In normal times, we might have said that people would be against it,” Sharabutinova said. “But of course, these are not normal times.”
– Clare Sebastian and Olesya Dmitrakova Contributed report.
