Russia faces mounting challenges due to sanctions, falling energy exports, and a worsening economic outlook. KSE Institute warns of a deepening recession, rising fiscal pressure, and weakening ruble. The loss of traditional sources of FDI and negative sentiment affecting domestic investment are expected to hinder long-term growth.

In its recent overview “One year of sanctions”, KSE Institute warns that Russia’s recession will worsen in 2023. Sanctions are starting to bite, and the depletion of inventories of critical imported inputs is driving up costs. Industries with the highest rents and/or growth potential are the hardest hit. 

Energy earnings are falling. Russia’s record-high current account surplus of $227 billion in 2022 will collapse this year due to sanctions and falling oil and gas exports. The EU embargo on crude has significantly reduced demand, and Russia is selling at huge discounts to new buyers. The loss of the European energy market will cost Russia $1 trillion by 2030, according to the IEA. 

Budget deficit grows. Russia’s fiscal pressure is increasing, and the budget deficit is expected to grow to 5-6% of GDP under current sanctions, and 7-9% if the price cap is lowered, and energy sanctions are tightened. High domestic borrowing is putting upward pressure on rates, pushing up the cost of servicing debt, and may lead to financial instability risks. 

Ruble becomes weaker. The weakening ruble is driving up import prices, posing risks for inflation and financial stability. Further measures such as cutting the oil price cap could exacerbate Russia’s fragility, widen the deficit, and put the country into a constrained and fragile economic situation. To stabilize the economy, tighter policies are needed, including monetary policy that may lead to interest rate hikes and tensions between the central bank and government. 

The war is making Russians poorer. Hidden unemployment in Russia is estimated to be around 13%. According to the experts of KSE Institute, falling real wages and incomes, decreasing savings, and lower retail sales indicate that Russia’s labor market is showing signs of trouble. The departure of foreign brands and declining quality of domestic products further add to the impact. 

A stronger sanctions regime is needed. Military production in Russia is being affected by export controls imposed by Ukraine’s allies, and a stronger sanctions regime is needed. The transportation sector is under strain as Russia is cannibalizing planes and struggling to find replacement parts. Coal exports have dropped by 6.8%, and the loss of traditional export markets is creating challenges for Russian companies in the mining of metallurgical ores, steel production, and wood processing. 

The full text of the “One year of sanctions” overview by the experts of KSE Institute is available at the following link: https://bit.ly/3m4q7JT