Russia faces ‘economic oblivion’ despite short-term resilience

Russia is facing “economic oblivion” in the long-term because of international sanctions and the flight of businesses, several economists have said.

The International Monetary Fund last week upgraded Russia’s gross domestic product estimate for 2022 by 2.5 percentage points, meaning the economy is now projected to contract by 6% this year. The IMF said the economy seemed to be weathering the barrage of economic sanctions better than expected.

The Central Bank of Russia surprised markets in late July by cutting its key interest rate back to 8%, below its pre-war level, citing cooling inflation, a strong currency and the risk of recession.

The ruble recovered from historic early losses in the aftermath of the invasion of Ukraine to become a top performer on the global foreign exchange market this year, prompting Russian President Vladimir Putin to declare that Western sanctions had failed.

Meanwhile, Russia has continued to export energy and other commodities while leveraging Europe’s dependency on its gas supplies.

However, many economists see long-lasting costs to the Russian economy from the exit of foreign firms – which will hit production capacity and capital and result in a “brain drain” – along with the loss of its long-term oil and gas markets and diminished access to critical imports of technology and inputs.

Ian Bremmer, president of Eurasia Group, told CNBC on Monday that while short-term disruptions from sanctions are less than originally anticipated, the real debate goes beyond 2022.

“Anecdotal evidence suggests the manufacturing dislocations are rising as inventories are depleted and scarcity of foreign parts becomes binding. Chips and transport are among the sectors cited, in some cases reflecting dual-use military demand,” Bremmer said.

“Governmental arrears may be contributing to broader shortages. Imports of consumer goods are increasing, but less so intermediate/investment goods.”

Bremmer highlighted that as sanctions intensify and popular discontent grows, the educated are leaving Russia, underscoring the importance of trade sanctions on sensitive technologies and the “longer timeline by which sanctions undermine trend productivity and growth.”

“Brain drain leads to a direct decline in the working age population, especially high-productivity workers, reducing GDP,” he said.

“It affects overall productivity, reducing innovation and affects overall confidence in the economy, reducing investment and savings.”

Eurasia Group projects a sustained, long-term decline in economic activity to eventually result in a 30-50% contraction in Russian GDP from its pre-war level.

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