Putin’s War Resets His Economy Four Years Back in One Quarter

The invasion of Ukraine by President Vladimir Putin set Russia’s economy back for four years, even though it was less severe than originally feared.

An economy that had been growing at the beginning of 2022 but slowed down during the second quarter is now showing signs of a grim outcome of the war against Russia. According to Bloomberg’s median forecast, the gross domestic product fell by 4.7% annually, data due Friday.

Trade was disrupted by international sanctions imposed in response to the war. Industries like car manufacturing were left paralysed while consumer spending spiked. Although the decline in the economy so far hasn’t been as severe as initially thought, the central bank projects that the slump will get worse in the quarters ahead and reach its lowest point in half of next year.

Despite Putin’s propaganda, the Russian economy is ‘crippled on every level’

At a briefing held in Moscow, Alexey Zabotkin, Bank of Russia Deputy Governor said the economy would move towards a new long-term equilibrium. “As the economy undergoes restructuring, its growth should resume.”

To contain market turmoil and protect the ruble, the Bank of Russia implemented capital controls and high-interest rate hikes. There has been enough calm to reverse many of these measures.

The fiscal stimulus as well as repeated rounds of monetary ease in recent months have all started to kick in, reducing the impact of international sanctions.

Evgeny Suprov, the lead Russia economist at CentroCredit Bank, stated that “the crisis is moving along an extremely smooth trajectory.”

Friday’s draft of the central bank’s policy outlook was published. It predicts that the economy will not return to its potential growth rate (1.5-2.5%) until 2025. The bank’s projections for 2022-2024 were unchanged. GDP is expected to shrink by 4%-6%, 1%-4%, and the next year.

A “risk scenario” was also discussed in the report. This would see global economic conditions worsen further and Russian exports are subject to additional sanctions. This could lead to Russia experiencing an economic slump that is more severe than the 2009 global financial crisis. If this happens, growth will only resume in 2025.

An economy that analysts at had predicted would contract 10% in the second half of this year has seen a more resolute response from authorities. Since improving their outlooks, economists from JPMorgan Chase & Co. as well as Citigroup Inc. now see output falling as low as 3.5% for the entire year.

The Bank of Russia still predicts that GDP would shrink by 7% in this quarter, and possibly more in the last three months of the year. According to it, the economy contracted by 4.3% in the second quarter.

New risks are being created by the standoff regarding energy shipments to Europe. According to the International Energy Agency (IAEA), monthly declines in oil production will begin as soon as August. They predict that Russia’s crude oil production will fall about 20% by next year.

In a report on monetary policies this month, the central bank stated that “the slump in 2022 won’t be as deep as expected in April.” “At the exact same time, the supply shocks’ impact may be longer over time.”

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