JP Morgan: The war is fatal to the Russian economy
Western sanctions are hitting Russia hard – harder than some experts expected.
Much was done before the war of Russia’s $643 billion in foreign exchange reserves. The idea was that the hideout would help insulate the country from sanctions. But about half of that money is under the control of commercial and central banks in the United States and its allies, The New York Times reports. Russia will therefore find it difficult to access this reserve.
JP Morgan offers a grim forecast for the country’s economy, predicting “a collapse in Russian GDP”. A report by the bank’s economists, led by Bruce Kasman, said: “The sanctions will hit the Russian economy, which now appears to be headed for a deep recession.”
They predict an 11% fall in GDP from peak to trough, similar to the dire state of the economy during the 1998 debt crisis.
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“The sanctions undermine the two pillars that promote stability – the Russian Central Bank’s ‘fortress’ foreign exchange reserves and Russia’s current account surplus,” the economists said. The current account measures a country’s trade in goods and services and capital transfers.
“Russia’s large current account surplus could have accommodated large capital outflows,” the economists said. “But with Russian central bank and SWIFT sanctions, in addition to existing restrictions, Russia’s export earnings will be disrupted and capital outflows are likely to be immediate.” SWIFT (Society for Worldwide Interbank Financial Telecommunication) is the messaging system that facilitates global payments.
Meanwhile, “downward pressure on the ruble and capital flight are pushing Russia’s central bank to dramatically raise rates and impose capital controls,” the economists said. “Imports and GDP will collapse.”