Russia: Economy contracts in Q2 amid sanctions blow
GDP contracted 4.0% year on year in the second quarter of 2022, according to a preliminary estimate released by Rosstat on 12 August. The result contrasted the first quarter’s 3.5% expansion and marked the worst downturn since the height of the Covid-19 pandemic in Q2 2020.
A complete breakdown of components is not yet available. However, the contraction was likely led by reeling domestic demand due to the fallout from the war in Ukraine and associated international sanctions. An exodus of foreign capital and deteriorating confidence should have hammered investment activity in Q2, while private spending was likely hurt by rising prices, higher interest rates and a lack of some imported goods. The external sector should have held up better, thanks to elevated prices for energy commodities globally—of which Russia is a key exporter.
Economic conditions deteriorated strongly towards the end of Q2, and the economy is expected to fall deeper into recession in Q3. The Central Bank expects the contraction in GDP to nearly double in the quarter after the second-quarter reading broadly matched its expectations. Continued international sanctions and a less favorable external environment due to lower energy prices and Europe’s oil and gas import restrictions will hurt activity. In the longer term, the country’s increasing economic and geopolitical isolation will likely keep growth well below its pre-war average.
Commenting on the outlook, Anatoliy Shal, economist at JPMorgan, said:
“We expect a fairly quick economic stabilization thanks to substantial policy support to growth and economy’s adaptation to new conditions, seeing sequential growth at close to zero by Q4 2022; we maintain our -3.5% growth forecast for this year and -1.0% for next. Yet, contrast to previous episodes, we don’t expect any strong bounce, i.e. the recovery is likely to be L-shaped, not V-shaped. And, in the long-run, sanctions will be a significant drag on Russia’s potential growth.”
On the long-term outlook, Holger Schmieding, economist at Berenberg, was even more downbeat, noting:
“We expect the Russian economy to weaken further and further over the coming years, limiting Russia’s ability to afford its oversized military and the costs of war over time. […] Loss of export revenues […], loss of access to Western technologies and capital […], brain drain of the best and brightest [and] increasing costs of repression [are] four drags on economic performance [that] can reinforce each other in a vicious circle for Putin’s Russia.”