Sanctions Could Shrink Russian Economy By 7%

Russia’s economy is expected to plunge into a deeper recession than the one caused by Covid-19 as a result of Western sanctions and the country’s increasing isolation after invading Ukraine.

Economists said measures imposed on Russian banks and companies by the US, EU, UK and their allies were having a severe impact on financial markets in Moscow. It could inflict more damage on Russia’s wider economy over time. Analysts at Goldman Sachs said it had cut its forecast for Russian gross domestic product for 2022 from 2% to a 7% decline.

Source: https://intellinews.com

Russia’s economy was estimated to have grown by 4.5% last year (2021) after having shrunk by almost 3% in 2020, the worst year of the pandemic for the global economy.

Analysts said the Ukraine war may have a limited impact on the global economy because trade links between Russia and the rest of the world were limited. The country accounts for 1.5% of global GDP, and for 2.9% and 0.9% goods exports from the eurozone and Britain respectively.

However, oil prices rose to more than $120 a barrel, the highest level since 2014, as the prospect of disruption in supplies from Russia sent energy markets surging further. Russia is the world’s second biggest oil exporter and its largest in natural gas.

Should recent increases in oil and gas prices be sustained, economists forecast higher inflation will hit households and businesses, and trigger a slowdown in economies across the world.

Analysts at the consultancy Oxford Economics said the pressure on Russian financial markets would damage Russia’s GDP significantly, by as much as 6% relative to a pre-crisis forecast in a “plausible downside scenario”.

The economic repercussions for Ukraine, as it suffers massive infrastructure damage and disruption from the Russian bombardment, is expected to be worse still. Evidence from previous war-hit countries suggests a slump of up to 60%. Eurozone and UK GDP could be about 0.5 percentage points lower than previously expected owing to the impact from soaring gas prices.

However, the analysts warned that a war lasting into 2023 with tougher sanctions from western governments and Russia retaliating by restricting gas supplies would cause a sharper fall of 7% in Russian GDP in 2023..

What are the repercussions for Malaysia? Impact will be on inflation, lower FDI, reduced tempo on domestic investments and consumption as investors/consumers defer investments or purchases. And instead of recovery in 2022/23, we will have some prolonged agony to 2024. IATA forecasts suggest that travel will only recover to 2019 levels by 2024.

Reference:

Russian economy could shrink by 7% as result of Ukraine sanctions, Richard Partington, 2 March 2022 (https://www.theguardian.com)