Surprisingly Resilient Russian Economy, Projected to Contract by Over 4% in Q2

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Russia is expected to record its first negative growth since the invasion of Ukraine. While there are predictions that the economic scale will revert to that of four years ago, considering the flood of sanctions from Western countries such as the United States and Europe, the economic impact has come relatively slowly, leading to an assessment that Russia has performed relatively well.

According to Bloomberg News on the 11th (local time), Russia will announce the preliminary GDP figures for the second quarter on the 12th. Bloomberg surveyed 12 analysts, and the forecasted annualized GDP growth rate for Russia in the second quarter is -4.7%. This would mark Russia's first economic contraction in over a year since the first quarter of last year. Although the GDP growth rate in the first quarter after the war in Ukraine began at the end of February was a positive 3.5%, it ultimately turned negative.

Alexander Isakov, a Russian economist, told Bloomberg Economics, "The Russian economy will return to the scale of 2018, four years ago, in the second quarter," adding, "Due to an accommodative monetary policy to support demand, the pace of recession is expected to slow somewhat until the fourth quarter." He further stated, "With the halt of energy imports from Europe worsening exports, the Russian economy is expected to shrink by an additional 2% next year."

The slump in Russia's economy in the second quarter appears to be due to the flood of sanctions from the United States and Europe following the war in Ukraine. As a result, trade with Russia has significantly decreased, some industries such as automobile production have halted factory operations, and consumer spending has also declined. The Russian Central Bank has forecasted that the economic situation will worsen over the coming quarters and that recovery will be difficult until the second half of next year.

However, despite the large-scale sanctions pouring down on Russia, economic experts judge that the impact has been less severe than expected. Some had predicted that Russia's second-quarter GDP growth rate could reach as low as -10% on an annualized basis, but this figure has come down to the 5% range. When Bloomberg surveyed analysts on Russia's second-quarter GDP growth forecast, it was -10.0% in March, then gradually decreased to -9.5% in April, -9.1% in May, -9.0% in June, and showed significant changes to -8.8% and -4.7% in July and August, respectively.

Last month, JP Morgan and Citigroup raised their forecasts for Russia's GDP growth rate this year from previous predictions of -7.0% and -9.6% to -3.5% and -5.5%, respectively. Evgeny Suborov, Chief Russian Economist at CentroCreditBank, said, "The crisis in the Russian economy is moving along a very soft trajectory," adding, "The Russian economy is expected to reach its bottom around mid-next year."

Bloomberg reported that the Russian Central Bank has played a role in controlling capital and suppressing sudden market and ruble fluctuations through significant interest rate hikes, and that the situation has improved enough for the Central Bank to withdraw such measures. In fact, immediately after the invasion of Ukraine, the Russian Central Bank raised the benchmark interest rate from 9.5% to 20% at once to prevent the ruble's value from falling. As the situation improved, it gradually lowered the rate, and last month adjusted it down from 9.5% to 8%, a level even lower than before the invasion.

In its monetary policy report this month, the Russian Central Bank analyzed, "The recession this year is expected to be less severe than anticipated in April," while also noting, "At the same time, the impact of supply shocks may expand over time."