Russian recession tipped to deepen in turning point year

Zelensky marks one year since Russia invaded Ukraine

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Russia is facing a deepening recession as Western sanctions bite deep, with Vladimir Putin rapidly approaching a “turning point”, a new report has suggested. Allied nations can “accelerate” Ukraine’s ultimate victory with additional measures to turn the screw on the Russian economy, the analysis, published by the Kyiv School of Economics (KSE) Institute, has claimed.

The report – published on February 24 and authored by the KSE Institute’s Sanctions Team – offers clear evidence that Western sanctions are placing increasing strain on the country’s trade dynamics and government finances, especially as those targeting the oil and gas industry,

It said: “The country is approaching a turning point in 2023 – and additional measures by Ukraine’s allies could exacerbate Russia’s fragilities, and accelerate victory.”

Highlighting what it termed a “macro picture worsening across the board”, the Institute said it had observed increasing strain “on multiple dimensions”, with Russia’s trade surplus slumping, a widening budget deficit and the ruble under pressure.

The report continued: “Painful policy choices loom.

“KSE Institute believes that official statistics – which show a 2.1 percent drop in real GDP for 2022 – conceal the true damage to Russia’s economy from the war and sanctions.

“Importantly, a much less supportive external environment will no longer be able to offset weak domestic demand this year, leading to a contraction of five to six percent in our baseline scenario – and a bigger drop if sanctions are tightened.”

As things stood, the Russian “war economy” was “propping up activity”, the report indicated, with weapons manufacturing supporting Russia’s industrial sector and the overall economy benefiting from state aid and import substitution.

The impact of sanctions was set to intensify as producers depleted supplies of components, it added.

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Simultaneously the government was cutting investment to pay for the war, the report pointed out.

It continued: “With the EU embargo and G7 price caps now in place, KSE Institute projects oil and gas earnings will drop by roughly 50 percent this year.

“And Russia could lose another $50 bn if the oil price cap is ratcheted lower to $30/bbl, as we propose.”

The report continued: “War is making Russians poorer. Even official data points to falling real wages and incomes, but the true impact is likely much bigger.

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“Sharply lower retail sales and decreasing savings point in this direction – while consumer sentiment took a significant hit at the time of mobilisation in the fall.

“Export controls by Ukraine’s allies have had a noticeable impact on Russia’s ability to produce military equipment – with important implications for the war.

“However, producers can rely on significant stocks of components; and Russia seems to be able to acquire inputs from countries such as China.

“Thus, strengthening of the sanctions regime, and vigorous enforcement is critical.”

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