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Russian economists provide an update for Russia in light of current sanctions and financial stresses. The takeaway: A harsh global recession is imminent. 

The Russian economic magazine ‘The Bell’ has released a new update for Russian economic prospects for 2022. This is the first 2022 analytical forecast of the fall of Russian GDP and the growth of inflation, which will be according to the rate of the Russian Central Bank and is impacted by the effect of the American oil embargo.

The Bank of Russia, interviewing economists and analysts, published the first assessment of the decline in the Russian economy and inflation growth. According to the surveyed experts, by the end of 2022 we will see a decline in GDP by 8% (this is the maximum since 1998), inflation at 20% and the dollar rate at 110 rubles.

The first supporting official statistics have been prepared. One week after the start of the “special military operation”, inflation accelerated by a multiple of four. Rising oil prices that could increase export income and support the ruble does not lead to such an effect due to sanctions and voluntary refusal of consumers in purchasing Russian raw materials.

The Central Bank’s survey has published the results of a monthly survey of 18 economists from authoritative organizations with estimates of the main macroeconomic indicators at 2022-2024. Typically, the consensus forecast of the Central Bank does not attract much attention – but today it became highly sought after following the start of the “special military operation” in assessing the coming decline of the Russian economy.

The median (most common) assessments of economists turned out to be as follows:
GDP: a fall by 8% in 2022, instead of growth by 2.4%, which appeared in the February forecast. This is the highest fall since 1998.
Inflation: 20% at the end of 2022 instead of 5.5%. If correct, it will be the highest since 2000.
The dollar rate: 110 rubles at the end of the year instead of 75 rubles. Today the dollar costs 118.5 rubles.
CB rate: 18.9% instead of 9.1%. Currently it is 20%.

2023 / 2024 Forecasts:

According to analysts, Russian GDP will grow by 1%, while inflation will decrease to 8% – but the ruble will be depreciated further to 118.4 per dollar.

In 2024, GDP will grow by 1.5%, inflation will slow up to 4.8% (still above the 4% Target set by the Central Bank), and the dollar will remain at the level of 120 per ruble.

The extreme values of the range of forecasts from Russian economists show inflation at 40%, a 23% decline in GDP, and dollar to 130 by end 2022. On the optimistic side, others state that inflation will not exceed 9.8%, the fall in the economy is 3.5%, and the dollar will fall to 100 per ruble (but not lower – there are no such optimists).

Inflation accelerates

The first inflation data in Russia following the Ukraine situation, published by Rosstat yesterday stated that during the past week prices increased by 2.2% in weekly expression, by 3.46% since the beginning of the year and 10.41% in annual terms.

Director of Investment “Loco-Invest” Dmitry Field calls what is happening “price shock, unprecedented by its nature” and lists its reasons: an increase in demand due to (very likely) record inflationary expectations and concerns of the deficit or complete disappearance of consumable goods (some temporary, some longer), the collapse of the ruble in the absence of certain landmarks, logistic limitations and an extremely high level of uncertainty.

It was difficult to predict inflation previously and so is more difficult now, it is problematic, but when observing similar trends to the end of March “We can easily see inflation in the range of 15-20% in annual expression.” Field notes that in the conditions of such current and expected inflation, the rate of Central Bank of 20% may not look high – and under current conditions its level is important from the point of view of maintaining financial stability: stabilizing the situation with ruble deposits in Banks and reducing the risks of the system banking crisis. “Of these considerations, the potential for increasing the rate is obvious,” – warns Field.

With Russian oil currency income from Russian exports (and above all, oil exports) now the main source of ruble support, are the conditions of maintaining the reserves of the Central Bank and the main reason why the national currency has not yet completed its valuation free fall. One of the first currency control measures was the obligation for exporters to sell 80% of their currency revenue.

However, this cannot completely stop the devaluation of the ruble, and the Central Bank has to introduce new prohibitive currency measures. On the evening of March 8, the United States introduced a ban on imports from Russia crude oil, petroleum products, liquefied natural gas and coal. This prohibition itself is not fatal both for the United States and for Russian oil exports.

Taking into account the fuel oil and other petroleum products to Russia in the American import of oil accounts for 7%, and in Russian exports, the United States takes less than 10%. Theoretically, Russia can redirect the volumes to China and India, although it can take time and assume a discount for the price.

What is happening is remeniscent of the Arab oil embargo of the early 1970s, when oil has risen in price in price in the year, however the underlying fundamentals  differ. The real blockade of Russian oil would require the introduction of secondary sanctions, as well as the cooperation of the EU, India and China. Europe also cannot refuse Russian oil (about 25% of imports).

But the incomplete and not very significant physically prohibition of imports of Russian oil is very important ideologically.

First of all, it strengthens the “self-sufficiency” regime, and so blocks about two thirds of Russian oil exports. World traders and consumers with the beginning of the “special operation” of Russia in Ukraine are supported by Russian oil. Last week, Russian Urals was traded with a record discount to Brent – more than $28 per barrel. But Shell, who bought a batch with a discount, was subjected to such a criticism that he very soon announced a gradual complete refusal to Russian hydrocarbons.

Secondly, the West showed Russia that the embargo on oil is no longer just a word, and that it is ready for the escalation of sanctions. On this Russia, in the face of Deputy Prime Minister Alexandra Novaka, has already threatened to respond to the overlap of the Nord Stream – 1 gas pipeline. “The execution of this threat is more likely to hurt Russia, even more reducing its foreign exchange earnings.”

The probability of the Snow Coma scenario of sanctions with measures against the buyers of Russian oil is growing every day.  In this case, to go to the risk that Russian oil is carried, and the Indian and Chinese buyers will have to be involved with longer term solutions put in place.

Europe however will be in a deep crisis. The more Russian oil leaves the market, the higher the prices will be, because it is impossible to replace with something rapidly (or its essential part). The only significant capacity reserve is from Saudi Arabia, whose relationships with the US are variable. This week, ex-minister of energy Alexander Novak watched oil for $300 in the case of a wide embargo. Analysts quotes that this is indicative for at least $200 per barrel. Such prices mean a shock, comparable to the oil shock of the Iranian revolution of 1979. It seems that now, like then, the world is moving to a harsh global recession.