A leaked document from Russia privately admits that Russia is bound to face the largest economic collapse in recent history because of devastating sanctions from the West.
The document, obtained from the Russian Finance Ministry by Bloomberg, predicted that the Russian economy would fall by a staggering 12% in its Gross Domestic Product (GDP) for this year. To put this into perspective, the figure will be the largest drop-off in Russia’s GDP since 1994, when the country was stumbling towards a capitalist market under Boris Yeltsin’s administration.
The Russian government has not yet released an official economic outlook since the start of Vladimir Putin’s invasion of Ukraine in late February. However, insider information within the country’s economic ministry says that the agency predicts a more optimistic 8% decline in GDP this year.
“Preparation of official macroeconomic forecasts does not fall under the Finance Ministry’s authority,” the Russian Finance Ministry said, claiming the leaked information was inaccurate.
”(The Ministry) expects that the measures taken by the government and the Bank of Russia will make it possible to ease to a large extent the negative consequences of sanctions and ensure stable economic development,” it added.
The Bank of Russia has said in April that it expects an economic contraction of 8 to 10 percent for 2022, while the International Monetary Fund forecasts 8.5%. If the prediction of the Russian Finance Ministry is true, such a decline could uproot decades worth of economic progress under the Putin administration, according to one insider.
This news will certainly add to the mounting pressure on Putin, who has been under fire by his own Kremlin officials who warned of severe economic and political repercussions of his “special military operation.” The ruble, Russia’s currency, might appear to hold strong, but the waves of economic sanctions from the United States and its allies are definitely taking effect.
The sanctions imposed against Russia affected the situation in the financial sector, spurred the demand for foreign currencies, and caused sales of financial assets, a cash outflow from banks, and surging demand for goods,” Governor of the Bank of Russia Elvira Nabiullina.
Russia is an export-oriented economy, meaning that a large part of the government’s revenue comes from the goods it sells to its trade partners. With the flurry of economic sanctions, goods from Russia have lost a significant part of its clientele, particularly in Europe.
Europe and Russia have uneasy economic codependency that was growing before the attack on Ukraine. European countries such as Germany and Hungary are highly dependent on oil imports to fuel their thirsty economies. On the other hand, Russia provides them with oil in exchange for much-wanted revenue, which funds the Putin regime.
However, with the outcry over the atrocities in Ukraine and the West taking a stand against Moscow, Russian oil is slowly losing its customers. The United States and Britain were the first ones to ban Russian oil and other Russian imports from Russia, but they were not that significant trading partners, to begin with. However, the big development is that Europe, which buys around half of Russia’s oil, now plans to prohibit such imports into the continent.
The European Commission has proposed a draft that will gradually ban the purchase of Russian oil and petroleum products by the end of the year. If passed, this will spell a catastrophic blow to the Russian oil revenue, which many believe is what fuels Putin’s war machine.
In a recent meeting, the G7 countries – Canada, France, Italy, Japan, Germany, Britain, and the U.S. – have agreed to release another round of sanctions against Moscow, this time targeting Russian media and financial executives.
The group of nations also agreed to follow the United States’ lead to prohibit all imports of Russian oil into their country. Three G7 countries – France, Germany, and Italy, are also in the European Union (EU).
“The main negatives are the oil embargo, the EU is giving up Russian gas, along with more departures from foreign companies,” Chief Economist at the Moscow-based BCS Financial Group, Natalia Lavrova.
“All that will probably expand gradually, with a lot of negative carrying over in on 2023,” Lavrova added. She predicted that Russia’s GDP will shrink by 10.8 percent in 2022 and will be followed by another 5 percent next year. This figure could still grow if more sanctions are imposed on Moscow.
Currently, the Russian economy is believed to be about $1.4 trillion a year. This is in contrast to the United States which has a GDP of nearly $21 trillion a year. Russia’s economic output has fluctuated widely since 2013 when it reached an all-time high of $2.29 trillion. Following the invasion of Ukraine in 2014, its economy contracted to just $1.28 trillion and slowly rose again to 1.69 trillion in 2019 only to see COVID cause another steep drop to $1.48 in 2020.
With economic sanctions hurting Russian exports and denying it imported goods and an estimate of $900 million a day spent on the war in Ukraine, Russia is bleeding out rapidly in trying to sustain not only the war effort but its economy at home.