June 4, 2023

“I was driving through Moscow and the traffic jams were the same as before,” said Andrei Nechayev, Russia’s economy minister in the early 1990s.

China and India’s readiness to snap up cheap Russian oil has helped, but Nechayev and other analysts say Russia’s economy has already started to decline and is likely to face a prolonged period of stagnation due to Western sanctions.

The exodus of Western companies, and the waves of punitive Western sanctions targeting Russia’s vital energy exports and its financial system, are having an impact, but not as many expected.

Nechaev presided over some of Russia’s most turbulent economic times and helped guide its transition to a market economy, and he credits the central bank for some of that.
Earlier this year, the ruble did drop to a record low against the dollar in the wake of the invasion, as the West froze about half of Russia’s $600 billion in foreign reserves. But it has rebounded to its highest level against the dollar since 2018. (Remember President Joe Biden threatened to reduce it to “rubble”?)

This was largely the result of aggressive capital controls and rate hikes in the spring, much of which have since been reversed. Interest rates are now lower than before the war, and the central bank said inflation, which peaked at nearly 18% in April, is slowing and will be between 12% and 15% for the full year.

The central bank also raised its GDP forecast for this year, which is now expected to shrink by 4% to 6%. The April forecast is for a contraction of 8% to 10%. The IMF is now also forecasting a 6% contraction.

Moscow has been trying to create a

The Kremlin has eight years to prepare, spurred by Western sanctions following Moscow’s annexation of Crimea in 2014, which helps the Kremlin.

“The withdrawal of Mastercard and Visa has little impact on domestic payments, as the central bank has its own alternative payment system,” Nechaev said.

Russia established the Mir credit card and its own transaction processing system in 2017.

There’s a reason why Russian fans of McDonald’s and Starbucks still have access to their fast-food solutions, said Chris Weaver, founding partner of Macro Advisory Ltd, a consultancy that advises multinational corporations in Russia and Eurasia.

Since 2014, many Western brands in Russia have bowed to government pressure to localize some or all of their supply chains. So when these companies leave, it’s relatively easy for Russian buyers to buy them and keep running them, just replacing the wrapping paper and packaging.

“Same people, same product, same supply,” Weaver said.

However, this is not a completely unassailable strategy.

The rebranded McDonald’s store reported a shortage of fries in mid-July, when Russia’s potato harvest was short and foreign suppliers were unable to fill the gap due to sanctions.

Can Russia’s energy boom last?

Fast food continuity is one thing. Russia’s long-term stability depends on its energy sector, which remains by far the largest source of government revenue.

To say that high energy prices have so far insulated Russia would be an understatement.

Revenue from oil and gas sales to Europe doubled between March and July this year, the International Energy Agency said. despite declining sales. Gas supplies to Europe have fallen by around 75% over the past 12 months, according to the IEA.

Oil is another matter. The International Energy Agency forecast in March that Russian oil would be withdrawn from the market by 3 million barrels per day from April due to sanctions or the threat of sanctions, a forecast that did not materialize. Exports held steady despite Rystad Energy analysts pointing to a slight drop in summer exports.

The main factor is Russia’s ability to find new markets in Asia.

Most of Russia’s seaborne oil exports have gone to Asia since the war began, according to Houmayoun Falakshali of commodities consultancy Kpler. In July, it was 56%, compared to just 37% in July 2021.

Russia's seaborne oil exports to Asia have soared this year.
According to Kpler, between January and July this year, China’s imports of Russian Urals crude oil, which were heavily discounted by sea, increased by 40% compared with the same period last year. This is despite China’s initial efforts to avoid taking sides in Russia’s war with Ukraine. India’s seaborne imports from Russia rose by more than 1,700% over the same period, according to Kpler. Russia has also been increasing its natural gas exports to China via the Siberian pipeline.

What happens when Europe’s embargo on 90% of Russian oil goes into effect in December will be crucial. An estimated 2 million barrels a day of Russian oil will sit idle, and while some of that could go to Asia, experts doubt demand will be enough to absorb it all.

Russia consumes millions of dollars of natural gas every day.That's why

Falakshali said China cannot buy more Russian oil than it does now because domestic demand has slowed and it simply doesn’t need Russia to export more of a specific type of oil.

Prices will also play a key role in Russia’s ability to continue discounting to secure new markets.

“A 30 percent discount at $120 a barrel is one thing,” Nechaev noted. “Discounts starting at $70 are another story.”

‘slow burn’

While global inflation is helping Russia’s energy sector, it is hurting its people. Like the rest of Europe, Russians are already suffering from a cost of living crisis, made worse by the war in Ukraine.

Nechayev, who helped Russia weather a more dramatic economic collapse in the 1990s, expressed concern.

“In terms of living standards, if you measure by real income, we’ve gone back about 10 years,” he said.

The Russian government is working hard to solve this problem. In May, it announced a 10% increase in pensions and minimum wages.

It has established a system that allows employees of companies with “suspended activities” to temporarily transfer to another employer without breaching their employment contract. It also spent 17 billion roubles ($280 million) on Russian airline bonds crippled by airspace bans and sanctions that prevented foreign manufacturers from repairing and supplying parts.

Technical sanctions, like those affecting the aviation industry, may have the most far-reaching impact on Russia’s long-term economic prospects. In June, U.S. Commerce Secretary Gina Raimondo said global semiconductor exports to Russia had plummeted by 90 percent since the war began. This is crippling production of everything from cars to computers, which experts say will put it further behind in the global technology race.

“The impact of sanctions will be a slower burn, not a quick hit,” Weaver said. “Russia is now facing a prolonged period of stagnation.”

Nechaev is more explicit. “Now, the recession has started,” he said.

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