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Russia faces ‘economic oblivion’ despite claims of short-term resilience, economists say
PUBLISHED TUE, AUG 2 20225:51 AM EDT
https://www.cnbc.com/2022/08/02/russia-faces-economic-oblivion-despite-short-term-resilience.html

‘Catastrophically crippling’
A Yale University study published last month, which analyzed high-frequency consumer, trade and shipping data that its author’s claim presents a truer picture than the Kremlin is presenting, argued that rumors of Russia’s economic survival had been greatly exaggerated.

The paper suggested international sanctions and an exodus of more than 1,000 global companies are “catastrophically crippling” the Russian economy.

“Russia’s strategic positioning as a commodities exporter has irrevocably deteriorated, as it now deals from a position of weakness with the loss of its erstwhile main markets, and faces steep challenges executing a ‘pivot to Asia’ with non-fungible exports such as piped gas,” the Yale economists said.

They added that despite some “lingering leakiness,” Russian imports have “largely collapsed,” with Moscow now facing challenges in securing inputs, parts and technology from increasingly jittery trade partners and as a result, seeing widespread supply shortages in its domestic economy.

“Despite Putin’s delusions of self-sufficiency and import substitution, Russian domestic production has come to a complete standstill with no capacity to replace lost businesses, products and talent; the hollowing out of Russia’s domestic innovation and production base has led to soaring prices and consumer angst,” the report said.

“As a result of the business retreat, Russia has lost companies representing ~40% of its GDP, reversing nearly all of three decades worth of foreign investment and buttressing unprecedented simultaneous capital and population flight in a mass exodus of Russia’s economic base.”

No path out of ‘economic oblivion’
The apparent resilience of the Russian economy and the resurgence of the ruble was largely attributed to soaring energy prices and strict capital control measures – implemented by the Kremlin to limit the amount of foreign currency leaving the country – along with sanctions restricting its capacity to import.

Russia is the world’s largest exporter of gas and second-largest exporter of oil, and thus the hit to GDP from the war and associated sanctions has been softened by high commodity prices and Europe’s continued dependence on Russian energy for the time being.

Russia has now relaxed some of its capital controls and cut interest rates in a bid to bring the currency down and shore up its fiscal account.

“Putin is resorting to patently unsustainable, dramatic fiscal and monetary intervention to smooth over these structural economic weaknesses, which has already sent his government budget into deficit for the first time in years and drained his foreign reserves even with high energy prices – and Kremlin finances are in much, much more dire straits than conventionally understood,” the Yale economists said.

They also noted that Russia’s domestic financial markets were the worst performing markets in the world so far this year despite the strict capital controls, with investors pricing in “sustained, persistent weakness within the economy with liquidity and credit contracting,” along with Russia’s effective ostracization from international financial markets.

“Looking ahead, there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia,” the report concluded.

“Defeatist headlines arguing that Russia’s economy has bounced back are simply not factual – the facts are that, by any metric and on any level, the Russian economy is reeling, and now is not the time to step on the brakes.”