The Russian economy enters in 1998 “three times” with the foreign exodus
(Bloomberg) – Russia’s international isolation is leaving local businesses struggling as foreign companies head for the exits, helping to push the economy deeper into recession.
Besieged by international sanctions following President Vladimir Putin’s invasion of Ukraine, the world’s 11th largest economy is experiencing a wave of multinational company departures in sectors as varied as car manufacturing, sporting goods and appliances appliances.
For the former Russian partners of these companies, the only choice is to retool on the fly in hopes of staying in business. Ikea, Renault SA, Apple Inc., Nike Inc. and Royal Dutch Shell Plc are among those who have pulled out.
Nearly 3 million Russians are at risk of losing their jobs and working either for foreign-based companies or for domestic companies in joint ventures with counterparts abroad.
For billionaire Oleg Deripaska, himself under US sanctions since 2018, the situation is already serious enough to recall Russia’s default in 1998 – only “three times” worse.
Gross domestic product contracted by 5.3% in 1998 while unemployment exceeded 13% the following year. But Goldman Sachs Group Inc. and JPMorgan Chase & Co. see a contraction of 7% in 2022. Bloomberg Economics forecasts a fall of around 9% and says it could reach 14% if restrictions on energy exports are imposed .
“The crisis will last at least three years and will be extremely harsh,” Deripaska said Thursday at a forum in the Siberian city of Krasnoyarsk. “An iron curtain has fallen.
The sad truth is that while Russia wasted no time in seeking to contain the creeping financial meltdown with capital controls and other emergency measures that shut down local markets, the devastation that it has inflicted on its economy is no quick fix.
Ikea is suspending local operations after more than two decades of presence, a move it says will directly impact its 15,000 employees. Major automaker Avtovaz, majority-owned by Renault SA and an employer of more than 34,000 people, suspended assembly in two cities after running out of components.
Meanwhile, retailers are stocking up on staples like buckwheat and salt. VTB Group, Russia’s second-largest bank among internationally sanctioned lenders, said it attracted more than half a million new savers and nearly $9 billion in cash in just three days by offering deposit rates of up to 21%.
Despite soaring oil prices, the war in Ukraine has come at a precarious time for the Russian economy, long deprived of investment and heavily dependent on imports in sectors as varied as textiles and cosmetics.
Over the past four years, the share of foreign goods in non-food retail trade has barely budged and reached 75% in 2020, according to a November report from the Moscow Higher School of Economics. For auto parts as well as toys and games, their proportion was over 90%, according to the study.
Even after the government has pushed Russia through the test of sanctions since Putin’s annexation of Crimea in 2014, the sudden decoupling of the global economy is crippling output and threatening to dampen growth for years to come.
The ruble’s collapse of more than 30% so far this year will further wreak havoc on household finances as shortages and uncertainty drive up inflation.
“No gloomy scenario will be an exaggeration,” said Sofya Donets, chief economist at Renaissance Capital in Moscow. “Inside the country, payment settlement and logistics have not been disrupted, but prices have increased and stocks will run out in a month or two.”
Without government support, unemployment could exceed 10%, according to Donets, reaching a level not seen when Putin won his first presidential term more than two decades ago. The unemployment rate was 4.4% in January.
What Bloomberg Economics says…
“Early signs suggest that the current crisis is at least as bad for Russia as the great financial crisis of 2008-2009 or the default of 1998. The economic fallout will be proportionately large – with the price of Vladimir Putin’s war almost certainly a deep recession.
–Scott Johnson and Tom Orlik
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In addition to trying to stabilize markets and stop capital outflows, the government is drawing up an anti-crisis program, with the first package of measures to help the economy adjust having already been approved this week. As part of an effort to anticipate any shortages, health and industry ministers met with representatives of pharmaceutical manufacturers and distributors to ensure supplies.
The central bank is still tightening the screw after having already doubled borrowing costs. In the latest move, people looking to buy hard currency on the open market will have to pay brokers a 12% commission.
For all its dependence on foreign products, Russia is more resilient after transforming from one of the world’s top food importers to a global exporter. Restrictions imposed in response to the first round of sanctions eight years ago have also made its own food supply much less dependent on foreign produce.
Yet the nation may never be the same again according to Deripaska, the founder of Hong Kong-listed aluminum giant United Co. Rusal International PJSC. and the target of US sanctions.
Calling for peace as a “first step” for an economy succumbing to crisis, he said Russia needed to move more decisively away from Europe and called for the country’s capital to be moved east to get closer to Asia.
“It’s our stubborn focus on the West – well, they don’t want us, we have to forget about them already,” he said.
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