The war in Ukraine and the sanctions will reduce the Russian economy by 10%
According to the European Bank for Reconstruction and Development, Russia’s economy will shrink by 10% this year as war in Ukraine and Western sanctions inflict the deepest recession since the early 1990s.
Russia’s gross domestic product will also stagnate in 2023 and experience very weak long-term growth, the bank said, as foreign buyers reduce their purchases of Russian oil and gas, foreign investors shun the country and educated young Russians emigrate. But its financial system has so far withstood the brunt of retaliatory measures from the West, he noted.
“Russia will take a hit and living standards will take a hit,” said EBRD chief economist Beata Javorcik. “But they will be able to withstand this shock in terms of macroeconomic stability. What will have the most impact on Russia is growth. . . zero growth next year and very weak growth in the longer term.
The EBRD said the war had triggered the “biggest supply shock” since the 1970s, which would have a “serious” impact on low-income countries far beyond eastern Europe.
He said actions taken by Russia’s central bank since the country’s invasion of Ukraine last month, including a sharp hike in interest rates and the injection of liquidity, have helped stabilize the banking system. . But Russian energy companies could struggle to pay their foreign currency debts as their overseas profits shrink, potentially causing “a bigger financial crisis”.
The EBRD’s updated forecast assumes a ceasefire between Russia and Ukraine “after two or three months, but sanctions will remain in place for the foreseeable future,” Javorcik said.
The multilateral bank, which stopped lending to Russia in 2014 after Moscow annexed Crimea, predicted that Ukraine’s war-battered economy would decline by 20% this year. Growth would rebound in 2023, but damage to physical infrastructure estimated by Kyiv at $100 billion would make the country much poorer.
Javorcik warned of a looming crisis for emerging markets and low-income countries. Policymakers will be under pressure to spend more to protect their populations from rising food and energy prices at a time of pressure on emerging market currencies and rising interest rates.
“They will be incentivized to continue with subsidies or even increase subsidies, in a world where public finances are already stretched,” Javorcik said.
The World Bank warned this week that the war could push millions into poverty and tip the poorest countries into a debt crisis.
The EBRD said North African economies as well as Lebanon have been particularly exposed to a reduced supply of wheat from Ukraine and Russia, two of the world’s largest exporters. Some would also suffer from the drop in tourist flows from Russia.
In Egypt, yields on its dollar-denominated government bonds rose following the invasion of Ukraine, reflecting its vulnerability to rising food and energy prices
Turkey, which imports more than 90% of its oil and gas needs, would likely see additional pressure on the lira, the EBRD said. Russians and Ukrainians make up a fifth of tourists visiting the country.
The economic impact of the Russian invasion would also ripple through central and eastern Europe, the EBRD added, with the Baltic states bearing the brunt of the trade disruption.