Russia could face a longer and deeper recession as the impact of US and European sanctions grows, according to an internal report prepared for the government.
The document, which is the result of months of work by officials and experts trying to assess the true impact of Russia’s economic isolation from President Vladimir Putin’s invasion of Ukraine, will be released in the usual optimistic public statement by officials. It depicts a far more tragic situation. Bloomberg saw a copy of the report drafted for a closed-door meeting on Aug. 30. Those familiar with the proceedings confirmed its authenticity.
Two of the report’s three scenarios show that the recession will accelerate next year, with the economy returning to pre-war levels in a decade or more. In the ‘inertia’ scenario, next year’s economy is expected to bottom 8.3% below 2021 levels, and in the ‘stress’ scenario, the 2024 low is 11.9% below last year’s level. expected to be standard.
In all scenarios, sanctions pressure may increase and more countries may join sanctions. Europe’s sharp departure from Russian oil and gas could also hit the Kremlin’s ability to supply its own markets, the report said.
Beyond the limit itself, which covers about a quarter of imports and exports, the report notes that Russia is now facing a “blockade” that “affects virtually all forms of transport,” further shutting down the economy of Technical and financial restraints add to the pressure. The report estimates that as many as 200,000 IT specialists may leave the country by 2025, the first official projections of a growing brain drain.
Officially, the sanctions hit less than feared, with a contraction of perhaps less than 3% this year and even less in 2023. Outside economists have also adjusted their outlook for this year, and the economy has held up better than expected.
The document calls for a number of measures to support the economy and further mitigate the impact of restrictions in order to return the economy to pre-war levels in 2024 and grow steadily thereafter. But the measures include many of the same measures to spur investment the government has touted over the past decade, when growth has largely stagnated even without sanctions.
Tas said Economy Minister Maxim Reshetnikov was questioned about the Bloomberg report in Vladivostok early Tuesday morning and said the forecast was “an analytical estimate used to calculate what would happen if there were no resistance and no action.” called.
The report warns that over the next year or two, “production will decline in a variety of export-oriented sectors,” from oil and gas to metals, chemicals and wood products. Some recovery is possible later, but “these sectors will no longer be the engine of the economy.”
A complete cut off of Russia’s gas supply to Europe, Russia’s main export market, could cost as much as 400 billion rubles ($6.6 billion) in annual tax revenue, according to the report. Even in the medium term, we cannot fully make up for lost sales in new export markets.
Oil sector hit
As a result, production will have to be cut, threatening the Kremlin’s goal of expanding domestic gas supplies, the report said. The lack of technology required for liquefied natural gas plants is “critical” and could hamper efforts to build new ones.
Europe’s plan to halt imports of Russian petroleum products (some 55% of exports last year went there) could lead to sharp cuts in production and fuel shortages on the domestic market as well.
The report says metal producers are losing $5.7 billion a year to regulation.
If the global economy hits a recession, Russia could become a “swing supplier” to global markets and exports could be cut further as demand for Russian goods dies first, the report warns. . That could cause the ruble to plummet and inflation to spike.
On the import side, “the main short-term risk is the shutdown of production due to shortages of imported raw materials and parts.” In the long run, the inability to repair imported equipment could permanently limit growth. The report says there is.
“For some important imports, we have no alternative suppliers at all,” he said.
Even in the agricultural sector, where the Kremlin touts efforts to replace foreign supplies, reliance on key inputs will force Russians to cut back on food consumption as supplies dwindle, according to the report. may disappear.
Limited access to Western technology could put Russia a generation or two behind current standards.
The report warns that the sanctions will force the government to revise various development goals set by President Putin before the war, such as increasing population and increasing life expectancy.
By sector, the report details the extent of the sanctions’ blow.
• Agriculture: 99% of poultry production and 30% of Holstein dairy cattle production are entirely dependent on imports. Staple seeds such as sugar beets and potatoes are also mostly imported from abroad, as are fish feed and amino acids.
• Aviation: Ninety-five percent of passenger traffic is carried on foreign-built aircraft, and lack of access to imported spare parts can lead to fleet shrinkage when aircraft are no longer in service.
• Machine build: Only 30% of machine tools are made in Russia, and the local industry does not have the capacity to meet the increased demand.
• Pharmaceuticals: About 80% of domestic production relies on imported raw materials.
• shipping: EU restrictions have tripled the cost of road transport.
• Communications and IT: Due to SIM card restrictions, Russia could give up SIM cards by 2025, and the telecommunications sector could fall behind world leaders by five years in 2022.
Image credits: Bloomberg