How Russia’s Economy Defied Wall St’s Predictions of Post-War Pain
- Major investment banks expected Russia to suffer severe economic damage after invading Ukraine in February.
- But the Russian economy has held up better than expected, leading them to revise those forecasts.
- Here are three graphs that show the resilience of the Russian economy in the six months since the start of the war.
When President Vladimir Putin’s forces invaded Ukraine in late February, many Wall Street analysts rushed to predict Russia’s economic downfall. Six months later, they were forced to revise these forecasts.
These dire warnings seemed set to come true in the weeks following the outbreak of war. Western allies have imposed economic sanctions, such as oil import bans and the removal of the Russian ruble from international currency markets.
But the Russian economy has shown great resilience. These three graphs show how.
Economic growth continues
In March, leading investment bank JPMorgan said Russia’s gross domestic product would fall 35% in the second quarter from the previous one. Goldman Sachs predicted its economy would suffer its worst contraction since the implosion of the Soviet Union in the early 1990s.
But Russia’s GDP fell just 4% year-on-year in the three months to June 30. In fact, its economic growth declined at a faster rate after the outbreak of the coronavirus pandemic, when GDP fell by 7.4% in the second quarter of 2020.
Given this, JPMorgan concluded that the Russian economy had withstood the brunt of harsh sanctions.
The available data “does not point to a sharp drop in activity – at least for now,” its strategists said in a note recently. “The GDP profile therefore looks increasingly likely to be consistent with a prolonged, but not very deep, recession.”
Stronger than expected exports of Russian commodities, including crude oil, helped support the economy. The country has also benefited from strong demand among its own consumers and a Kremlin-designed program to keep unemployment low, according to the International Monetary Fund.
“Domestic demand is showing some resilience thanks to the containment of the effect of sanctions on the domestic financial sector and a weaker than expected weakening of the labor market,” the IMF said in July.
Oil exports boosted by Asian pivot
Wall Street analysts have also predicted that Western oil import bans will seriously hurt Russia, the world’s third-largest oil producer behind the United States and Saudi Arabia.
Its economy is heavily dependent on its energy exports, with oil and gas revenues accounting for 45% of its federal budget last year, according to the International Energy Agency.
The United States imposed an embargo on Russian energy imports in March, while the EU agreed to a phased ban – which so far affects 75% of Russian oil purchases – in May.
In March, Goldman Sachs said Moscow was unlikely to find other crude oil trading partners, given that its expulsion from the SWIFT banking system prevented the Russian Central Bank from using its foreign exchange reserves.
“To illustrate the point, there are no reports so far of increased Chinese purchases of Russian crude, nor has China increased its imports of Iranian or Venezuelan crude in recent years,” they said. its analysts.
But Russia still exports 7.4 million barrels of its oil every day, according to Bloomberg data for July.
India’s purchases of Russian oil played a big role. Its imports increased for five months in a row before falling slightly in June. It still absorbs 1 million barrels of Russian oil a day, a 900% increase from February.
And Europe has not yet succeeded in weaning itself off Russian crude. The EU is still bringing in 2.8 million barrels a day, according to Bloomberg data. That’s just a 30% drop from February’s 4 million barrels per day.
Relaunch of the activity of factories and services
Wall Street saw only pain for Russia’s manufacturing and service sectors as Western economic sanctions hit.
In the wake of the Ukraine invasion, Russia’s composite purchasing managers’ index — which tracks trends in both sectors — fell. It fell from 50.8 in February to 37.7 in March, with a reading above 50 indicating growth and below 50 indicating contraction.
Goldman Sachs strategists said the contraction was “widespread, with sharp declines in production, new orders and especially new components of export orders.” They noted that Moscow should prepare for further declines.
But a few months later, Russia’s composite PMI is back in growth territory.
The index climbed to 44.4 in April, rose above 50 in June and hit 52.2 last month. This latest reading means that Russia’s economic health is booming – a far cry from the dire predictions being made on Wall Street.