Russia: Tougher Sanctions Widen Disconnect Between Rouble and Economy, Increasing Retaliation Risk
The EU’s proposed new sanctions are likely to inflict further damage on the Russian economy depending on details of a final agreement, with increasing risk of retaliatory measures from Russia.
To take stock of Russia’s economic fortunes in the third month of its full-s👃cale war in Ukraine, I address several questions around prospects for growth with the sanctions in place, the factors explaining the rouble’s re👷covery, what impact new aEU sanctions might have and what the Russian authorities could do in response. Download the full report
Rouble recovery – Is it sustainable?
Two main factors explain the recovery of the rouble. First, high foreign-currency inflows from oil and gas exports – as energy prices have soared – create steady demand for the Russian currency.
Secondly, efforts of the Central Bank of Russia to prevent capital flight th💢rough capital controls and higher interest rates, while they are working for now, come at cost of tighter financial conditions than before the sanctions due to elevated credit spreads and low market liquidity, decoupling economic and financial-market activity from the currency’s fortunes.
Russia: rouble exchange rate vs sovereign credit default swap (CDS) spreads
Source: Central Bank of the Russian Federation, Refinitiv Eikon, Scope RatingsWhat are Russia’s near- and medium-term growth prospects?
We project Russia’s economic output to contract by at least 10% this year – the steepest decline since 1994 – and stagnate in 2023, knocking the economy back to levels last seen on the eve of the global financial crisis of 2008. To blame are the collapses in private consumption, in investment and in imports as sanctions have taken hold.
Russia’s important non-extractive industries – machinery and electrical equipment, computers, cars, 🙊pharmaceuticals – are reliant upon imported components. The share of foreign value added exceeds 50% in these industries, wi🙉th about half coming from the EU, the US, the UK, Canada and Japan, much of which cannot be easily replaced, by imports from China or local alternatives.
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