Putin’s war hurls economy back 4 years in 1 quarter
President Vladimir Putin’s invasion of Ukraine set Russia’s economy back four years in the first full quarter after the attack, putting it on track for one of the longest downturns on record even if less sharply than initially feared.
In a bleak tally of the war for Russia, an economy that was picking up speed at the start of 2022 swung into a contraction during the second quarter. Data due on Friday will show gross domestic product shrank for the first time in over a year, dropping an annual 4.7%, according to the median forecast of 12 analysts surveyed by Bloomberg.
The jolt of international sanctions over the war disrupted trade and threw industries like car manufacturing into paralysis while consumer spending seized up. Although the economy’s decline so far isn’t as precipitous as first anticipated, the central bank projects the slump will worsen in the quarters ahead and doesn’t expect a recovery until the second half of next year.
“The crisis is moving along a very smooth trajectory,” said Evgeny Suvorov, lead Russia economist at CentroCredit Bank. “The economy will reach its low point by mid-2023 at best.”
The Bank of Russia acted to contain the upheaval in markets and the ruble with capital controls and steep hikes to interest rates. Enough calm has returned to roll back many of those measures.
Fiscal stimulus and repeated rounds of monetary easing in recent months have also started to kick in, blunting the impact of international sanctions. Oil extraction has been recovering and spending by households showed signs of stabilization.
On Friday, the central bank published a draft of its policy outlook for the next three years, predicting the economy will take until 2025 to return to its potential growth rate of 1.5%-2.5%. The bank’s projections for 2022-2024 remained unchanged, with GDP forecast to shrink 4%6% and 1%-4% this year and next, respectively.
The report also included a so-called risk scenario where global economic conditions deteriorate further and Russian exports come under additional sanctions. If that happens, Russia’s economic slump next year may be deeper than during the global financial crisis in 2009 and growth would only resume in 2025.
The response by authorities so far has ensured a softer landing for an economy that analysts at one point expected would contract 10% in the second quarter. Economists from banks including JPMorgan Chase & Co. and Citigroup Inc. have since improved their outlooks and now see output dropping as little as 3.5% in the full year.