Sanctions ruin Russia’s economy, leading to recession

Since Russia invaded Ukraine in February, western nations have imposed a variety of sanctions against Moscow. The sanctions primarily target the political, military and economic elite responsible for the invasion and seek to reduce Russia’s capacity to fund the war. The restrictive measures seem to be working, if recent economic indicators are any guide.

A recession is typically defined as two consecutive quarters of economic downturn, and Russia experienced a technical recession in late 2020 and early 2021 during the coronavirus outbreak. With 3.5% GDP growth in the first quarter of 2022, the Russian economy was showing signs of a good recovery, but the start of the invasion of Ukraine set the economy once more on a downward path.

The latest report by Rosstat, the official statistics agency, indicated that the economy has entered a recession as a result of a 4% decline in third-quarter gross domestic product. The economy is suffering as a consequence of Western sanctions, which caused a similar 4% contraction in the second quarter.

While economic output in the third quarter shrank by 4%, less than the 4.5% contraction economists had predicted, wholesale trade fell 22.6% and retail trade fell by 9.1%, both of which contributed to the recession. On the plus side, agriculture expanded by 6.2% and construction by 6.7%.

The restrictive measures imposed on Moscow target the import and export of certain goods. The International Monetary Fund (IMF) is now predicting that Russia’s imports will decline by 25.4% this year compared to 2021, while exports will decline by 17.2%. The World Bank projects that the country’s imports will decline by 35.2% in 2022 and exports will decline by 30.9%.

Russian businesses also have been significantly affected by both the conflict and the sanctions. The main index of the Moscow Exchange has fallen by more than one-third since February.

The MOEX Russia Index began its steady decline in mid-February, going from over 3,600 points to below 2,200 in October. The stock exchange was actually closed from Feb 25, when it finished at 2,470 points, until March 24 as market authorities sought to limit the potential impact on business of the Western response to President Vladimir Putin’s moves.

When the market reopened in March, the index increased to 2,800 points before falling once more. It has been fluctuating between 2,000 and 2,200 points since July, and closed at 2,206 last Friday.

Despite the country’s economy being in decline, Russia’s unemployment rate was a relatively low 3.9% in September.

But inflation is projected to increase significantly this year, with the World Bank predicting an annualised average of 22% and the IMF 21.3%. The Organisation for Economic Cooperation and Development, however, believes the rate will be a more modest 13.9%.

In October, the Central Bank of Russia kept its key interest rate at 7.5%. It was the first time since the beginning of the military offensive in Ukraine that the rate had been left unchanged.

According to Governor Elvira Nabiullina, the central bank’s decision to delay changing the interest rate until the end of the year was a sign of “adaptation” to a “new reality”.

In light of significant challenges as a result of export and import restrictions, staff shortages and problems with the availability of spare components, the central bank projected that Russian GDP would decline by 3.5% this year. The IMF anticipates a contraction of 3.4% and the World Bank believes GDP will fall by 4.5%.

Sources: https://www.themoscowtimes.com/2022/11/16/russia-falls-into-recession-a79398 https://www.consilium.europa.eu/en/infographics/impact-sanctions-russian-economy/ https://www.reuters.com/markets/russian-economy-shrinks-4-third-quarter-statistics-agency-2022-11-1 6/ https://www.foreignaffairs.com/russian-federation/russias-road-economic-ruin