Russia is about to suffer the most severe economic collapse since Vladimir Putin rose to power at the turn of the millennium, as sanctions imposed on the country after he invaded Ukraine are expected to wreak more damage than any previous crisis the Russian strongman has faced.
On April 29, Russian central bank governor Elvira Nabiullina slashed the country’s interest rates by three percentage points for the second time in less than a month, after forecasting a severe recession, soaring prices, and coming labor market upheaval as the country pays the price for its unprovoked war.
“Supply is contracting more significantly than demand, which is intensifying inflationary pressure,” she said.
Gross domestic product is expected to nosedive by a minimum of 8% this year, and could even shrink by as much as 10%, the most since 1994, according to the World Bank.
Nabiullina dismissed the Russian government’s rosy first-quarter GDP figure, which showed an expansion of 3.7%, as nothing more than a temporary effect driven by people stocking up on goods before they disappear. As inventories gradually run out, the damage will continue to worsen over the course of the year and peak in the final three months of this year, according to her analysis.
The central bank governor singled out the country’s auto industry, with its complex cross-border supply chains, as a prime casualty of the sanctions.
“Companies that used foreign raw materials or components are facing problems as they are gradually running out of stocks,” she said.
No V-shaped recovery next year
Like many emerging economies dependent on raw material exports, Russia has had other sharp contractions before: The country’s output experienced a 3% decline during the 2020 pandemic and a 7.8% drop in 2009 following the global financial crisis.
But even in Nabiullina’s more optimistic scenario, she estimates that this year’s plunge in GDP following Western sanctions will easily top those, if not blow them out of the water.
Making matters worse, Nabiullina predicted the economy would not snap back next year, as it had done previously. Instead, in a best-case scenario, it would stagnate on an annual basis in 2023, and at worse decline by a further 3%.
Consumer prices could soar by 18% to 23% this year, with the rate of increase only set to cool significantly from next April, the bank forecasts.
On Friday, Russia’s main interest rate fell to 14%, although it still remains elevated compared to the 9.5% just prior to February’s invasion.
But whether the latest cut will help animate people to spend money anytime soon amid the uncertainty over the war is another matter.
“People now prefer to save rather than consume,” Nabiullina told reporters.
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