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Ukraine war, sanctions shrink Russian economy by 10%

EconomyUkraine war, sanctions shrink Russian economy by 10%

World Bank (Times Of Ocean)- The Russian economy will shrink by 10% this year as the war in Ukraine and western sanctions bring about its worst recession since the early 1990s, says the European Bank for Reconstruction and Development. unravel news

As overseas buyers reduce purchases of Russian oil and gas, foreign investors shun the country, and educated young Russians leave, the bank predicts that Russia’s gross domestic product will stagnate in 2023 and grow very slowly going forward. The report noted that its financial system had so far resisted the shock of retaliatory measures from the west.

“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.”

In its report on the impact of the war, the EBRD said the war had triggered the “greatest supply shock” since the 1970s, which would have a “significant” impact on low-income countries beyond eastern Europe.

According to the report, measures taken by Russia’s central bank following the invasion of Ukraine last month, including a sharp rise in interest rates and provision of liquidity, have helped stabilize the banking system. Energy companies in Russia might not be able to pay foreign currency debts as their overseas earnings shrink, potentially causing “a more significant financial crisis”.

The EBRD’s latest forecast assumes a ceasefire will occur between Russia and Ukraine “after two or three months, but sanctions will be in place for some time,” Javorcik explained.

After Moscow annexed Crimea in 2014, the multilateral bank stopped lending to Russia and forecast that Ukraine’s war-devastated economy would decline by 20 percent this year. Kyiv estimates that damage to physical infrastructure would amount to $100bn, leaving the country much poorer in 2023.

As Javorcik warned, a crisis is brewing in emerging markets and low-income countries. At a time when emerging market currencies are under pressure and interest rates are rising, policymakers will be under pressure to increase spending to cushion their populations from higher food and energy prices.

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

This week, the World Bank warned that the war could plunge millions into poverty and tip poorer countries into debt crisis.

North African economies, as well as Lebanon, have been particularly affected by the reduced supply of wheat from Ukraine and Russia, two of the world’s biggest exporters. Some will also suffer from reduced tourist flows from Russia.

Following the Russian invasion of Ukraine, Egypt’s dollar denominated government bonds yield increased, reflecting the country’s vulnerability to rising food and energy prices.

EBRD said Turkey, which imports more than 90% of its oil and gas, would likely see further pressure on the lira. Russia and Ukraine account for a fifth of all tourists to the country.

Moreover, Russia’s invasion would also have an economic impact across central and eastern Europe, the EBRD pointed out, with the Baltic states suffering the greatest disruptions.

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