Russian economy on the verge of collapse as sanctions take their toll

Russia’s economy is on the verge of collapse this year after the United States and its European allies hit the Kremlin with a series of crippling financial sanctions for its unprovoked invasion of Ukraine.

Russian manufacturing activity plunged in March, contracting at the fastest pace since May 2020, as companies faced a sharp rise in prices and a sharp drop in new orders. Western sanctions have effectively isolated Russia from the international financial system and prevented it from accessing new technologies.

Experts believe this is just the start of a major slide for Russia’s economy this year.

The Institute for International Finance (IIF), a Washington-based think tank, has estimated that Russia’s gross domestic product, the broadest measure of goods produced in a country, could fall 15% in 2022 and 3% in 2023 due to sanctions, wiping out decades of growth. A contraction of this magnitude would be about twice as strong as the Russian recession during the 2008 global financial crisis.

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“Further escalation of the war could lead to more boycotts of Russian energy, which would significantly harm Russia’s ability to import goods and services, deepening the recession,” the IIF said in a note. analyst last month.

Meanwhile, Goldman Sachs predicts the economy could contract by 10% this year – having previously predicted growth of around 2% – while Capital Economics predicts a contraction of 12%. Barclays economists, including Brahim Razgallah, said in an analyst note that Russia’s economy could plunge as much as 12.4% in 2022.

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Russian President Vladimir Putin attends a meeting with award-winning young cultural professionals via video conference in Moscow, Russia, Friday, March 25, 2022. (Mikhail Klimentyev, Sputnik, Kremlin Pool Photo via AP, file/AP Images)

“Due to current geopolitical conditions, we assume the sanctions will be long-lasting,” they wrote.

Western allies targeted Russia with harsh financial sanctions after the February 24 invasion of Ukraine, including cutting off a key part of the Central Bank of Russia by preventing it from selling dollars, euros and coins. other foreign currencies in its reserve stock of approximately $630 billion; block certain financial institutions from the Swift messaging system for international payments; and sanctioning hundreds of Russian lawmakers and elites who have close ties to President Vladimir Putin.

On top of that, hundreds of Western companies – including Coca-Cola, McDonald’s and Goldman Sachs – decided to sever ties with Moscow after the invasion began amid intense pressure from investors and consumers. The pace intensified as relentless fighting in Ukraine spawned a massive humanitarian crisis.

Putin warned that Russia faced rising unemployment and inflation as it battled international sanctions, which he called an “economic blitzkrieg”.

Moscow is also on the verge of a historic default, according to Moody’s, as it attempted to redeem its dollar-denominated bonds with rubles. It would be the first time Russia defaulted on its foreign debt since the Bolshevik Revolution of 1917.

Pedestrians pass the entrance to a branch of Uniastrum Bank LLC, part of the Bank of Cyprus group, in Moscow, Russia, Tuesday March 19, 2013. A double taxation treaty and low tax rates have makes Cyprus the conduit of choice for Russian film (Andrei Rudakov/Bloomberg via Getty Images/Getty Images)

Russia made a payment due April 4 on two sovereign bonds in rubles rather than dollars that it agreed to pay under the terms of the securities.

Russia “can therefore be considered a default by Moody’s definition if it is not corrected by May 4, which is the end of the grace period,” Moody’s said Thursday. “The bond contracts do not provide for any reimbursement in a currency other than the dollar.”

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Finance Minister Anton Siluanov told Russian state media earlier this month that if the Kremlin was forced to default on its debt, it would take legal action.

“We are going to continue, because we have taken all the necessary measures so that the investors receive their payments,” Siluanov told the pro-Kremlin newspaper Izvestia. “We will show the court proof of our payments, to confirm our efforts to pay in rubles, just as we did in foreign currency. It will not be a simple process.”

It is unclear who Russia would pursue.

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