According to an internal report, Russia could face a deeper and longer recession due to the spread of US and European sanctions, which will impact sectors that Russia has depended on for many years to drive its economy.
- Contrast Confidential documents with positive public statements
- The report says key sectors face a sharp drop in output, brain drain
This document is the culmination of months of work by experts and officials trying to assess Russia’s economic isolation as a result of President Vladimir Putin’s invasion of Ukraine.
It paints a much more dire picture than officials often portray in their optimistic public statements. Bloomberg reviewed a copy of the report that was prepared for a closed-door meeting with top officials on August 30. Sources familiar with the proceedings confirmed that it was authentic.
The report shows that the economy will contract faster next year than the other two scenarios. However, the economy will return to its prewar level at the end or later of the decade. The “inertial” scenario sees the economy at 8.3% below its 2021 level. While the “stress” scenario places the low in 2024 at 11.9% below last year’s level.
All these scenarios show that sanctions will only get more severe, with more countries expected to follow suit. The report stated that Europe’s abrupt withdrawal from Russian oil may have an impact on the Kremlin’s ability to supply its market.
The restrictions, which affect about 25% of exports and imports, are not the only problem. The report also details Russia’s current “blockade”, which “has affected practically every form of transport,” further limiting the country’s economy. The pressure is exacerbated by financial and technological restrictions. According to the report, as many as 200 000 IT professionals could leave the country by 2025. This is the first official prediction of the growing brain drain.
Officials claim that the impact of sanctions has been much less than expected. The contraction could be less than 3% this year, and less in 2023. The outlooks for this calendar year have been adjusted by outside economists, who reaffirmed initial predictions of a deep recession. However, the economy has performed better than expected.
This document proposes a series of measures to support and reduce the economic impact of the restrictions. The goal is to see the economy return to pre-war levels by 2024 and continue to grow steadily thereafter. The steps are many of the same measures that the government promoted over the past decade to encourage investment, even though growth has slowed down.
When Maxim Reshetnikov was asked about the Bloomberg report Tuesday morning in Vladivostok he said that the forecasts were “analytical estimations that we used to calculate the outcome if we don’t resist, don’t do anything,” according to Tass.
The report predicts that there will be a reduction in production in many export-oriented sectors over the next year, including oil and gas, metals, chemicals, and wood products. Although some recovery is possible, these sectors will no longer be the engines of the economy.
According to the report, a complete cutoff of gas supplies to Europe (Russia’s largest export market) could result in tax revenue losses of up to 400 billion rubles ($6.6 Billion per year). Even in the medium term, it won’t be possible for lost sales to be fully compensated with new markets.
According to the report, this will result in a reduction in output, which could threaten Kremlin’s goals to expand domestic gas supplies. The absence of the technology required for liquefied natural gas plants is “critical” and could hinder efforts to build them.
Europe’s plan to stop importing Russian oil products — 55% of the exports went there in 2013 — could lead to sharp production cuts and fuel shortages on the domestic market.
According to the report, metal producers are losing $5.7Billion annually due to the restrictions.
The report warns that if the world economy falls into recession, Russia’s exports could be cut further because it will become the “swing supplier” to global markets. This would lead to a drop in demand for Russia’s products. This could lead to a drop in the ruble as well as an increase in inflation.
The report stated that the main risk for importers is “the suspension of production due to lack of imported raw material and components.” However, over the long term, the inability to repair imported equipment could limit growth.
It stated that there are no other suppliers for certain critical imports.
According to the report, even in the farm sector where the Kremlin boasts of its efforts to replace foreign supplies, Russia’s dependence on key inputs could cause them to decrease their food consumption as supplies diminish.
Russia may be a generation behind the rest due to restrictions on western technology access. Russia will have to rely on less sophisticated alternatives from China and Southeast Asia as a result.
The report warns of sanctions that will force the government to reconsider a number of development targets Putin set before the war. These include those for increasing population growth and life expectancy.
The report provides sector-specific details of the impact of sanctions.
- Agriculture: Imports account for 99% of the poultry production and 30% of Holstein dairy cow output. Imports are a major source of staples such as sugar beets, potatoes, and fish feeds.
- Aviation: 95% of passenger volume is carried by foreign-made aircraft. The inaccessibility to import spare parts could cause the fleet to decline as they are retired from service.
- Machine-building: Only 30% of machines are Russian-made, and the local industry isn’t able to meet the rising demand
- Pharmaceuticals: Around 80% of the country’s production is dependent on imported raw materials
- Transport: EU restrictions triple the costs of road transport
- Communications and IT: Russia could be left without SIM cards by 2025. Russia’s telecommunications sector will likely fall five years behind the world leaders in 2022.
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