Analysis suggests that the Russian economy, now in its second year of the invasion of Ukraine, is sinking into a low-growth quagmire. As Western financial sanctions and export controls against Russia intensify, the end of the high oil price benefits has dried up funding sources, leaving the economy facing multiple crises across the board.
On the 28th (local time), The Wall Street Journal (WSJ) reported that the Russian economy faces an increased possibility of long-term stagnation due to declining exports, inflation, labor market tightness, and increased government spending. The value of the ruble has fallen by 20% since November last year, and about half of Russian companies are suffering from labor shortages due to the conscription of 300,000 people carried out last autumn. According to the Gaidar Institute for Economic Policy in Russia, since data collection began in 1993, Russia is currently experiencing the worst labor shortage.
Due to such economic uncertainty, Russian companies have halted investments and consumption has sharply declined. Last year, Russia's retail sales decreased by 6.7%, the worst figure since 2015. Last month, new car sales in Russia dropped by 62% compared to the previous year.
Alexandra Prokopenko, a former senior official of the Russian Central Bank who left Russia shortly after the outbreak of the war, warned that "the Russian economy is entering a long-term recession."
Russia's finances are deteriorating as trade in crude oil and natural gas, its largest export items, worsens due to Western sanctions. One of the biggest causes of the crisis is the end of the high oil price benefits at the beginning of the war. The Russian government initially believed that European countries could not abandon their dependence on Russian energy, and indeed, Russia benefited from high oil prices early in the war.
However, Europe actively participated in the international community's sanctions against Russia by introducing price caps on Russian energy. With export routes blocked and energy prices falling, Russia was forced to sell energy to countries like China and India at prices significantly discounted from normal rates.
The price per barrel of crude oil Russia sold last month was $49.59, only about 60% of the international benchmark Brent crude price of $80 per barrel.
As a result, Russia's energy revenues in January and February this year fell by nearly half compared to the same period last year, and the fiscal situation is rapidly deteriorating. In the first two months of this year, the amount the Russian government spent beyond its income reached $34 billion (approximately 44.2 trillion won).
Even if Russia can continue spending by borrowing the strength of its sovereign wealth fund, which amounts to $147 billion (about 191 trillion won), concerns remain. The Russian sovereign wealth fund has decreased by $28 billion (about 36.4 trillion won) since the Ukraine war began.
Some argue that Russia performed relatively well last year, as its economy contracted by only 2.1% compared to the previous year despite various international sanctions.
However, this is merely an appearance caused by increased production due to the Russian government's various war-related expenditures and does not reflect reality. Prokopenko said, "(War expenditure) is not productive growth. It has nothing to do with developing the economy."
The International Monetary Fund (IMF) analyzed that Russia's potential growth rate, which was 3.5% before the occupation of Crimea in 2014, has now fallen to around 1%.
With unresolved issues of export decline and labor market supply shortages, and the Russian government spending astronomical amounts on the war, the possibility of inflation is also increasing.
Russia's inflation rate in February was 11% year-on-year. Although inflation is expected to fall from March, this is explained as a 'visual illusion' caused by the sharp price increases immediately after the Ukraine invasion last year.
Russian billionaire businessman Oleg Deripaska warned that cash is running out in Russia. He pointed out, "Next year, there will be no cash circulating in the economy," and emphasized, "Foreign investment is desperately needed."
Vasily Astrov, an economist at the Vienna Institute for International Economic Studies, pointed out, "(The current crisis facing the Russian economy) is not a crisis that will last just one or two years. The Russian economy is heading on a completely different path (from a short-term recession)."
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