Ukraine war and sanctions to shrink Russian economy by 10%

Russia’s economy will shrink by 10 per cent this year as the war in Ukraine and western sanctions inflict the deepest recession since the early 1990s, according to the European Bank for Reconstruction and Development.

Russian gross domestic product will also flatline in 2023 and suffer very low growth over the long term, the bank said, as overseas buyers reduce purchases of Russian oil and gas, foreign investors shun the country and educated young Russians emigrate. But its financial system had so far withstood the shock of retaliatory measures from the west, it noted.

“Russia will take a hit and living standards will take a hit,” said Beata Javorcik, EBRD chief economist. “But they will be able to weather this shock in terms of macroeconomic stability. What is going to impact Russia more is growth . . . zero growth next year and very low growth longer-term.”

The EBRD said the war had triggered the “greatest supply shock” since the 1970s, which would have a “severe” impact on low-income countries far beyond eastern Europe.

It said measures taken by Russia’s central bank since the country’s invasion of Ukraine last month, including a sharp rise in interest rates and provision of liquidity, have helped stabilise the banking system. But Russia’s energy companies could struggle to pay foreign currency debts as their overseas earnings shrink, potentially causing “a more significant financial crisis”.

The EBRD’s updated forecast assumed a ceasefire between Russia and Ukraine “after two-three months but that sanctions will remain in place for the foreseeable future”, Javorcik said.

The multilateral bank, which stopped fresh lending to Russia in 2014 after Moscow’s annexation of Crimea, predicted that Ukraine’s war-battered economy would decline by 20 per cent this year. Growth would rebound in 2023 but damage to physical infrastructure estimated by Kyiv at $100bn would leave the country much poorer.

Javorcik warned of a brewing crisis for emerging market and lower-income countries. Policymakers will come under pressure to spend more to cushion their populations from higher food prices and energy prices at a time of pressure on emerging market currencies and rising interest rates.

“They will have an incentive to continue with subsidies or to even increase subsidies, in a world where public finances are already strained,” Javorcik said.

The World Bank warned this week that the war could push millions of people into poverty and tip poorer countries into a debt crisis.

The EBRD said north African economies as well as Lebanon have been particularly exposed to a reduced supply of wheat from Ukraine and Russia, two of the world’s biggest exporters. Some would also suffer from reduced tourist flows from Russia.

In Egypt, yields on its dollar denominated government bonds increased in the aftermath of the invasion of Ukraine, reflecting its vulnerability to rising food and energy prices 

Turkey, which imports more than 90 per cent of its oil and gas needs, would likely see further pressure on the lira, the EBRD said. Russians and Ukrainians account for a fifth of tourists visiting the country.

The economic impact of Russia’s invasion would also ripple across central and eastern Europe, the EBRD added, with the Baltic states suffering the greatest hit from disruption to trade.

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