Russia prepares for massive recession and prolonged stagnation in the wake of Ukraine war

The European Bank for Reconstruction and Development said a recession in Russia would likely turn into a prolonged stagnation, while neighboring economies would rebound next year unless a permanent ceasefire is secured in the coming months.

While Ukraine will suffer more in the short term due to widespread damage to its physical infrastructure, Russia faces more long-term challenges from the exodus of well-educated workers and loss of access to Western technologies under current sanctions, the bank said. said.

The EBRD was established in 1991 to help countries in Eastern Europe and the former Soviet Union transition from center planning to market economies. Russia has stopped making new investments in the country after the country’s 2014 annexation of Crimea and said on Monday it was closing its Moscow office.

The bank said it estimated that the region most directly affected by the fighting accounts for 60% of Ukraine’s annual economic output and that nearly a third of Ukrainian businesses have had to suspend operations. Electricity consumption is 60% below normal levels for this time of year.

Assuming that a ceasefire can be negotiated in the next two months, the EBRD expects Ukraine’s GDP to contract by a fifth this year, compared to its previous estimate of 3.5% growth. The economy should bounce back and grow by 23% in 2023 if the economy receives reconstruction aid.

“Even in the optimistic scenario of rebuilding, it’s still going to be a very poor country because a lot of stocks have been destroyed,” said EBRD chief economist Beta Javorik.

Following Moscow’s attack on Ukraine, the US and its allies adopted the most severe economic sanctions ever against a country with the explicit aim of damaging Russia’s economy, cutting it off from international finance, and preventing it from importing key technologies. Is.

The EBRD expects those sanctions to contribute to a 10% contraction in the Russian economy this year, with previously projected growth of 3%. Contrary to its outlook for Ukraine, the bank does not expect a rebound in 2023 and sees prospects remaining weak thereafter.

“There will be less investment, less international trade, less integration of Russia into global value chains, and this combined with people leaving Russia means less long-term productivity growth,” Ms Javorik said.

The EBRD economist said the drag on growth will continue even if sanctions are lifted as part of the peace deal.

“This effect, I hope, will last beyond sanctions, if there is no regime change,” she said.

The prospect of a weak economy for Russia is bad news for Central Asian countries that have maintained close economic ties with the country.

The EBRD estimates that money sent home by citizens working in Russia accounts for between 5% and 30% of annual economic output in Armenia, the Kyrgyz Republic, Tajikistan and Uzbekistan. Countries in the region depend on Russian banks for their connections to the global financial system, and most of their trade with other countries goes through Russia.

“They will need to re-orient the flow of business,” Ms Javorik said. “Not just because Russia will be poor and buy less, but also to access other markets.”

The EBRD lowered its growth forecasts for two of the 33 countries in which it invests beyond Ukraine, spanning North Africa, Central Asia, the Caucasus and Central and Eastern Europe. The exceptions are Azerbaijan and Turkmenistan, both of which are major producers of natural gas.

Rating agency Moody’s Investors Service said in a separate report on Thursday that weak confidence will impact growth, especially in countries bordering Russia and Ukraine.

“Across Europe, the security threat will exacerbate economic shocks, weighing on consumption and investment, which are geographically closest to conflict,” Moody’s said.