Despite Putin’s bluntness, the Russian economy is hurting

London (CNN) When Russia unleashed its full scope Ukraine invasion One year ago, Western countries responded in an unprecedented way Penalties To punish Moscow and pile pressure on President Vladimir Putin. The goal: to deliver an economic blow so severe that Putin will reconsider his brutal war.

As a result, the Russian economy weakened. But it also showed Amazing flexibility. Demand for Russian oil has also fallen in Europe and Moscow redirect their barrels to Asia. The country’s central bank avoided a currency crisis with Strict capital controls and raise interest rates. Military spending supported the industrial sector, while the scramble to replace Western equipment and technology increased investment.

The Russian economy and system of government have turned out to be much stronger than the West thought. Putin said in a speech to the Russian parliament Tuesday.

However, the cracks are beginning to appear and will widen over the next 12 months. European Union – who spent More than 100 billion dollars On Russia’s fossil fuels in 2021 – very far in phasing out purchases. Mass that dramatically reduce its dependence On Russian natural gas last year, it officially banned most Russian crude oil imports by sea in December. It enacted a similar ban on refined petroleum products this month.

These measures Russia’s financial situation is already straining as it struggles to find alternative customers willing to pay high prices. The government announced a budget deficit of about 1.761 billion rubles ($23.5 billion) in January. Spending jumped 59% year over year, while revenue fell 35%. Deputy Prime Minister Alexander Novak announced that Russia will cut oil production by about 5% starting in March.

“The era of windfall profits from the oil and gas market for Russia is over,” Janice Kluge, an expert on Russia’s economy at the German Institute for International and Security Affairs, told CNN.

Birds fly over buildings at an oil refinery in the Siberian city of Omsk, Russia, on February 8, 2023.

Meanwhile, the ruble fell to its weakest level against the US dollar since last April. The weak currency contributed to the rise in inflation. Most companies say they can’t envision growth right now given the high levels of economic uncertainty, according to A recent study by a Russian think tank.

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These dynamics put the country’s economy on a downward trajectory. And They will force Putin to choose between increasing military spending and investing in social goods such as housing and education — a decision that could have consequences for the war and the Russian public’s support for it.

“This year could really be the major test,” said Timothy Ash, associate fellow in the Russia and Eurasia program at Chatham House, a think-tank.


In an effort to subjugate Russia to its aggression, Western countries have used their influence over the global financial system, revealing more than 11,300 penalties Since the invasion, about $300 billion of the country’s foreign reserves have been frozen. At the same time, More than 1,000 companiesranging from BP (BP) to McDonald’s (mcd) And Starbucks (SBUX)They exited or scaled back operations in the country, citing opposition to the war and new logistical challenges.

Russia’s economic output duly shrank by 2.1% last year, according to a preliminary estimate from the government. But the hit was more limited than forecasters initially expected. When the sanctions were first imposed, some economists predicted a 10% contraction. or 15%.

One of the reasons for the unexpected Russian pluck was Push for self-sufficiency following Putin’s annexation of Crimea from Ukraine in 2014. Through a policy known as “Russia Fortress” the government Boost local food production Policy makers forced banks to build up their reserves. Ash said at Chatham House that this created a degree of “sturdiness”.

The swift intervention of Russia’s central bank, which raised interest rates to 20% after the invasion and implemented currency controls to prop up the ruble, was also a stabilizing force. So was the need for factories to increase the production of military goods and to replace items that were imported from the West.

But the biggest support came from rising energy prices and the world’s persistent thirst for oil and other commodities.

Russia, the world’s second largest exporter of crude oil, was able to send barrels that were going to 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 per day in 2021, was still buying 2.3 million barrels per day through November, according to the International Energy Agency (IEA).

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“It’s a matter of natural resources,” said Sergei Aleksachenko, Russia’s former deputy finance minister. It happened Last month it hosted the Center for Strategic and International Studies, a think tank. He added that this means that the economy has witnessed a decline, but “it is not a collapse.”

Russia’s oil problem

In fact, Russia’s average monthly oil export revenue rose 24% last year to $18.1 billion, according to the International Energy Agency. However, a repeat performance is unlikely, heralding increasingly difficult decisions for Putin.

The price of a barrel of Urals crude, Russia’s main blend, fell to an average of $49.50 in January after the European oil embargo – plus G-7 price cap – entered into force. By comparison, the global standard was about $82. It indicates that customers like India and China, see A smaller group of interested buyers, negotiating larger discounts. Russia’s budget for 2023 is based on a price in the Urals of more than $70 per barrel.

Finding new buyers for processed petroleum products, which are also subject to new embargoes and price ceilings, will not be easy. Ben McWilliams, an energy consultant at Bruegel, noted that China and India have their own networks of refineries and prefer to buy crude oil.

Meanwhile, gas exports to Europe have plummeted since Russia shut down the Nord Stream 1 pipeline.

A motorcyclist drives past an oil depot in New Delhi, India, on Sunday, June 12, 2022.

The Russian government relied on the oil and gas sector for 45% of its budget in 2021. As it plans to maximize defense spending, cutting revenues inevitably means trade-offs. Spending plans for 2023 that were finalized in December included spending cuts on housing and health care, in addition to a category that includes public infrastructure.

“Whatever energy resources are acquired, they will be spent on military needs,” said Gulnaz Sharafutdinova, acting director of the Russian Institute at King’s College London.

in decline

The International Monetary Fund still expects the Russian economy to expand 0.3% this year and 2.1% the next. However, any outlook hinges on what happens in Ukraine.

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“Whether the economy contracts or expands in 2023 will be determined by developments in the war,” Tatyana Orlova, an economist at Oxford Economics, wrote in a note to clients on Tuesday. She noted that a shortage of workers linked to military conscription and immigration was a major risk.

The impact of Western sanctions is expected to develop into a crisis over time. Bloomberg Economics estimates that Putin’s war in Ukraine will Cut $190 billion from Russia GDP by 2026 compared to the country’s pre-war trajectory.

Import-dependent sectors were particularly vulnerable. It owns domestic automakers such as AvtoVAZ, which makes the famous Ladas Struggle with imperfection of the main components and materials.

A man talks on his phone near a closed H&M store on December 15, 2022 in Moscow, Russia.

The auto industry in Russia was already weak after companies like Volkswagen (VLKAF)And Renault (RNLSY)And stronghold (F) And April (NSANF) It halted production and began selling off its domestic assets last year. Chinese companies have beefed up their presence, as part of a broader trend. However, new car sales fell 63% year-on-year in January, according to the European Business Confederation.

Across sectors, companies are struggling to plan for the future. A November survey of more than 1,000 Russian companies by the Stolypin Institute for Economic Growth found that nearly half plan to maintain production for the next year or two and don’t think about growth. The group said this contributed to the rising risk of a “protracted stagnation of the Russian economy”.

Given Putin’s ideological commitment to Ukraine’s integration, he is unlikely to back down, according to Cherfutdinova at King’s College London. She added that his war chest is “inevitably likely to diminish”.

She added that prioritizing military spending would have a social cost, with a “slow and insidious” erosion of living standards.

“In normal times, we would probably have said that the population would protest against this,” said Cherfutdinova. “But of course, these are not normal times.”

– Claire Sebastian and Olesya Dimitrakova Contribute to the preparation of reports.

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