1. Important sanctions on Russian oil and gas were phased in only gradually in 2022. However, meaningful measures in this area are now in place. Furthermore, Europe successfully moved away from Russian gas. As energy prices also returned to pre-invasion levels towards the end of 2022, we expect oil and gas earnings to decline sharply in 2023. 

2. Lower exports — and production — of hydrocarbons will weigh on the economy. We expect real GDP to contract by 6.1% this year. Importantly, the immediate crisis will be followed by an extended period of stagnation. Altogether, we believe that Russia’s economy will be more than 15% smaller in 2024 compared to a no-war/no-sanctions scenario. 

3. The impact from a less supportive external environment on government finances already materialized last year. Sharply higher expenditures due to the war also contributed to a meaningful shift of the federal government’s fiscal accounts compared to the pre-war budget. We forecast the deficit to widen further, to 6.5% in 2023 and 6.1% in 2024. 

4. Higher deficits will put significant pressure on financing, which has already become increasingly challenging in 2022H2. Russia will be depleting key macro buffers as it relies on the National Welfare Fund for budgetary support. At the same time, higher issuance of domestic debt, in the absence of foreign investors, will increase debt service costs. 

5. Sanctions on Russia’s central bank have severely limited access to reserves. A less supportive external environment will weigh on the ruble and increase inflationary pressures. In the absence of large FX inflows, the CBR will struggle to simultaneously address monetary and financial stability. A rate hike of around 300bps is likely in 2023H1.

6. Russia’s economy has long struggled with low productivity growth and this challenge will only grow. The country is now cut-off from important financial markets, many foreign companies have disengaged, and capital spending is crowded out by war-related expenditures. In addition, emigration of high-skilled workers will weigh on potential growth going forward.

7. Ukraine’s allies should impose additional sanctions now. With Russia’s economy approaching a turning point in the first half of this year, we believe that exacerbating vulnerabilities would help shorten the war.