Ukraine’s military interests could deepen Russia’s economic woes

Ukraine’s counterattack, which has recaptured vast territories occupied by Russia, could exacerbate Russia’s economic problems as international sanctions continue to shatter its fortunes.

Ukrainian forces have achieved incredible success in recent weeks, recapturing Russian-occupied territories in the northeast and south of the country. Now Kyiv wants to liberate Luhansk in the East Donbass region. This region is a key region where he is one of two of his pro-Russian self-proclaimed “republics”.

Holger Schmieding, chief economist at Berenberg, said recent Ukrainian military gains could hit the Russian economy hard.

“More than ever, the Russian economy is likely to slip into a gradually deepening recession,” Schmieding said in a report last week.

“The Growing Costs of a War That Goes Wrong [Russian President Vladimir] Putin, the cost of suppressing domestic dissent, and the slow but detrimental effects of sanctions are likely to collapse the Russian economy faster than the Soviet Union collapsed some 30 years ago.

He stressed that Russia’s influence on energy markets, especially in Europe, a key bargaining chip, has also waned over international sanctions imposed by the West.

“Putin closed the Nord Stream 1 pipeline on August 31, but the EU continues to fill gas storage facilities at a slightly slower pace, but still at a pace that is sufficient,” he noted. Even Germany, which has been particularly exposed to Russian supplies, can approach its target of 95% stocks before winter.

Europe’s rapid departure from Russian energy is especially painful for the Kremlin. According to the Economist Intelligence Unit, the energy sector accounts for about a third of Russia’s GDP, half of all fiscal revenues and 60% of exports.

Energy revenues plunged to their lowest level in more than a year in August, but that was before Moscow cut off gas supplies to Europe, prompting powerful armed European leaders to lift sanctions. I was hoping for The Kremlin has since been forced to sell oil to Asia at a significant discount.

The decline in energy exports means that the country’s fiscal surplus has been significantly depleted.

“Russia knows that it has no strength left in the energy war against Europe. Within a few years, the EU will remove Russia’s dependence on gas,” said EIU’s director of global forecasts. Agathe Demarais told CNBC.

This is the main reason Russia has now chosen to cut off the flow of gas to Europe, she suggested, with the Kremlin saying the threat could become much less important in a few years. I am aware of

The EIU forecasts that Russia’s GDP will contract by 6.2% this year and 4.1% next year, which is “very large both historically and internationally,” Demarais said.

“Russia did not experience a recession when it was first placed under Western sanctions in 2014. Iran, which was completely cut off from Swift in 2012, experienced only about a 4% recession in it. I didn’t. years,” she said.

Statistics on the true state of the Russian economy are scarce, and the Kremlin holds its cards relatively close to its chest. But Bloomberg earlier this month, citing internal documents, reported that Russian officials fear a much deeper and sustained recession than public claims suggest.

Putin has repeatedly said his country’s economy is dealing with Western sanctions, and Russia’s First Deputy Prime Minister Andrei Belousov said last month that inflation will be around 12-13% in 2022. This is well below the most pessimistic forecasts put forward by global economists in early 2020. Year.

Russia’s GDP contracted by 4% in the second quarter of this year, according to the National Statistics Office Rosstat, and Russia raised its economic forecast earlier this month, predicting contractions of 2.9% in 2022 and 0.9% in 2023, and then We expect it to return to 2.6%. Growth in 2024.

But Desmarais argued that all visible data “pointed to a collapse in domestic consumption, double-digit inflation, and declining investment,” and argued that the withdrawal of 1,000 Western companies would “decline access to jobs and innovation.” ‘, he argued, could also have an impact.

“However, the real impact of sanctions on Russia will be felt mainly in the long term. In particular, sanctions will limit Russia’s ability to explore and develop new energy fields, especially in the Arctic region.” she said.

“Because of Western penalties, it will be almost impossible to fund development in these areas.In addition, US sanctions will make it impossible to export the required technology to Russia. ”

“We cut off three-quarters of Russia’s banking sector from the international market. Nearly 1,000 international companies have left the country,” she said.

“Car production has fallen by three quarters compared to last year. Aeroflot is grounding planes because it has run out of spare parts. We take chips out of our refrigerators and repair military hardware. Russian industry is in shambles.”

She added that the Kremlin had “driven the Russian economy into oblivion” and vowed that the sanctions would “stay here”.

“Now is the time to show determination, not appeasement,” von der Leyen said.

A senior Russian official, long shunned by the West, visited Beijing last week as the Kremlin scrambled to strengthen security ties, with Russia seeing deepening its strategic ties with China as a key policy goal. said. Putin also met with Chinese President Xi Jinping in Uzbekistan last week, and the two countries stressed an “unlimited” relationship.

But some commentators point out that as Russia’s bargaining power on the world stage wanes, China will hold most of the cards as the two superpowers seek to cement further cooperation. There is

“In the long run, China will be Russia’s only economic option, but this process will also be difficult as China remains wary of over-reliance on Russian goods,” added EIU’s Desmarais. rice field.