Economy 11 March 2022, 12:30pm

This is why Putin is so wired: Russia expected to collapse this year

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Russia's economy will contract in 2022 by some 15% due to the severity of sanctions imposed over its invasion of Ukraine, and the rise in commodity prices will be both a tail- and a headwind across emerging markets, according to an analysis from the Institute of International Finance (IIF). This would be twice as large a recession as the country went through during the global financial crisis.

The IIF cut its 2022 GDP growth expectation for Russia by 18 percentage points, previously having had a 3% growth estimate, Reuters reported.

Further escalation of the war may bring more boycotts of Russian energy, which would drastically impair Russia's ability to import goods and services, deepening the recession,

said the IIF in a note signed by a group of its economists.

The expectation is for the economic contraction to be twice as sharp as the Russian recession during the global financial crisis. Not since the shock following the collapse of the Soviet Union, in the early 1990s, has there been such a devastating decline.

However, said the note, given Russia’s relatively small economy and its own moves to isolate from global financial markets, the IIF does not expect a broad emerging market contagion.

Instead, we think Eastern and Western Europe will be hit via their export exposure to Russia, something markets are only just beginning to price.

The IIF's forecast is extremely gloomy, projecting a much sharper downturn than the major analysts:

Goldman Sachs has recently revised its forecast for this year to a 7% contraction from a 2% growth;
Oxford Economics said Russia's GDP could contract by 6% this year relative to a pre-crisis forecast in a “plausible downside scenario”, but it believes that in case of a more protracted conflict even a 7% contraction is possible. And that's not even the worst-case scenario.
JP Morgan expects a decline of around 7% this year.
The Finnish central bank's forecast today is more pessimistic, with central bank president Olli Rehn saying the Russian economy could shrink by 10% this year.

The value of Russian imports is estimated to fall by about 50%.

Russia is trying to stabilise its financial situation, but with sanctions, it has little chance of doing so. Its ability and willingness to repay its debts has plummeted, and it is now on the verge of default. The Kremlin has called the Western sanctions an economic war and has acknowledged that the country is going through a shock.

Our economy is experiencing a shock impact now and there are negative consequences, they will be minimised,

Kremlin spokesman Dmitry Peskov told reporters on a conference call.

"This is absolutely unprecedented. The economic war that has started against our country has never taken place before. So it is very hard to forecast anything," he added.

Western countries have imposed more severe sanctions on Russia than previously expected, and hundreds of enterprises are putting their investments and operations in Russia on hold.

The leaders of the seven most advanced industrialised countries (G7) are taking steps to impose tariffs and quotas on Russian imports to put further pressure on the Russian economy rapidly spiralling into recession. US President Joe Biden is expected to make an announcement to this end as early as 15:15 GMT this afternoon.

Biden on Tuesday had imposed an immediate ban on Russian oil and energy imports. The United Kingdom has followed suit, but not with an immediate ban. Britain will phase out imports of Russian oil and oil products by the end of 2022 and consider banning its natural gas, joining other countries.

Europe is currently refraining from slapping an embargo on Russian oil and gas. Hungarian Prime Minister Viktor Orbán has also made it clear he will not back such a proposal, saying that the country "would be disproportionately burdened by these sanctions," and reminding that 85% of all gas entering Hungary comes from Russia, and fuel is produced from oil, 64% of which comes from Russia.

Moody's downgrades the ratings of 95 Russian corporates

Moody's Investors Service on Thursday downgraded the ratings of 95 Russian non-financial corporates, as well as the Baseline Credit Assessments in the case of Government-Related Issuers (GRIs).

The rating actions follow the sovereign rating action on the Government of Russia which took place on 6 March 2022, where Moody's downgraded Russia's long-term issuer rating and senior unsecured ratings (local and foreign currency) to Ca from B3.

The Other Short Term (local currency) rating remained unchanged at Not Prime (NP). Russia's local- and foreign-currency country ceilings were lowered to Caa2 from B2 and B3, respectively.

The downgrade of Russia's ratings was triggered by Moody's expectation that capital controls by the Central Bank of Russia (CBR) will restrict cross border payments including for debt service on government bonds.

"Moody's view is supported by a reported statement from the National Settlement Depository (NSD) that coupon payments on OFZ government bonds due on Wednesday 2 March have only been paid to local holders of the papers, citing the CBR order prohibiting payments to non-residents," said the rating agency.

The downgrade to Ca was hence driven by

severe concerns around Russia's willingness and ability to pay its debt obligations.

"Moody's view is that the risk of a default occurring has significantly increased and that the likely recovery for investors will be in line with the historical average, commensurate with a Ca rating."