- June 4, 2023
In the weeks after Russia’s invasion of Ukraine and the subsequent increase of Western sanctions in response to the invasion, the Russian economy plunged into a spiral.
In October 2022, Russian oil shipments hit a new low in the wake of the Ukraine conflict. In the spring of last year, the Moscow Exchange recorded its worst decline ever, the ruble’s exchange rate collapsed to all-time lows, and widespread panic spread across the financial system. You can read more about the effects of the war on Russia’s trading goods here.
The Russian Central Bank (CBR) acted swiftly to avert a full-blown financial catastrophe by imposing significant limitations on the capital and foreign currency markets, and eventually succeeded in bringing about market stability. While the official exchange rate of the ruble to the US dollar rose by 6% at the end of the year, the MICEX index fell by 43%.
This decline in GDP in Russia first appeared in the last spring season. According to early estimates from the ministry of economic development, it has contracted by 4-5% annually in recent months. Consensus Economics, which takes an average of projections from authoritative institutions, predicts a 3.5 percent slowdown in economic output in 2022 in its latest composite estimate.
The oil industry and Russia’s economy
The oil industry, which is crucial to Russia’s economy, has continued to underpin the country’s overall economic growth. The oil output increased by 2% from January to November, compared to the same period in the previous year. Much of what is produced is sent abroad. It wasn’t until the latter few months of 2017 that Russia’s crude oil shipments started to decrease.
The EU’s restriction on Russian crude oil imports went into effect in December, but the prohibition on petroleum product imports won’t take effect until the start of February. Russia actively sought for new oil export markets in 2017, with India being a primary focus. In fact, at the end of June 2021, Russia’s share of India’s total oil imports grew to 14%.
Russian export earnings reached a record high on the back of rising commodity prices, but imports began to fall precipitously last spring as a result of sanctions and the devaluation of the ruble. Since capital flight from Russia has been curbed thanks to sanctions and restrictions, most of the country’s record export revenues have stayed there. This resulted in a rapid rise in the value of the ruble at first, but the situation has since changed.
The preliminary data shows that both the volume and the price of Russian oil shipments dropped in December. The ruble has fallen in value and Russia’s current account surplus has shrunk as a result of falling export receipts.
Russia’s government finances have weakened along with oil exports and the economy. The federal budget deficit in 2022 will be much greater than predicted, according to Finance Minister Anton Siluanov’s latest evaluation. It will hit 2% of GDP.
In order to cover the growing deficit, the government issued more domestic bonds in the latter months of 2022. Some of the largest commodity producers in Russia, including gas giant Gazprom, were hit with windfall taxes that brought in significant money for the government at the year’s culmination.
Recent major projections have Russian GDP declining by 3-4% this year, making 2023 a particularly dismal year for the Russian economy. As sanctions take effect, exports are expected to fall dramatically. The federal budget for this fiscal year predicts a continuation of current levels of government expenditure.
Since most projections predict that Russian inflation would average 4-6% in 2023, this suggests a drop in real terms. The government budget deficit is projected to rise to at least 2% of GDP in 2023, regardless of whether or not spending changes. As long as Russia maintains its military presence in Ukraine, there is a significant possibility of even worse performance.
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