Russia: How Putin’s War Set Economy Back 4 Years in One Quarter

President Vladimir Putin’s invasion of Ukraine pushed the Russian economy back four years in the first full quarter since the attack, putting it on track for one of the biggest recessions on record, albeit less steep than initially feared.

In a grim account of the war for Russia, an economy that was picking up speed in early 2022 fell into contraction in the second quarter. Data due on Friday will show gross domestic product shrank for the first time in more than a year, falling 4.7 percent year-on-year, according to the median forecast of 12 analysts polled by Bloomberg.

According to Russian economist Alexander Isakov of Bloomberg Economics, “the economy will lose four years of growth, returning to its 2018 size in the second quarter. We expect the contraction to slow in the fourth quarter with looser monetary policy supporting demand. However , the economy will lose another 2% in 2023 as the European energy embargo cuts exports.”

The shock of international sanctions over the war disrupted trade and paralyzed industries such as the auto industry, while consumer spending soared. Although the decline in the economy so far is not as steep as initially expected, the central bank predicts the recession will worsen in the coming quarters and does not expect a recovery until the second half of next year.

“The crisis is moving on a very smooth trajectory,” said Evgeny Suvorov, chief economist for Russia at CentroCredit Bank. “The economy will bottom out by mid-2023, at best.”

Russia’s central bank moved to contain the turmoil in markets and the ruble with capital controls and sharp interest rate hikes. The calm that has returned seems sufficient for many of these measures to be suspended.

Fiscal stimulus measures and repeated rounds of monetary easing in recent months have also begun to have an effect, softening the impact of international sanctions. Oil production is recovering and household spending showed signs of stabilization.

On Friday, the central bank released a draft of its policy outlook for the next three years, predicting that the economy will need until 2025 to return to a potential growth rate of 1.5%-2.5%. The bank’s forecasts for 2022-2024 were unchanged, with GDP expected to contract by 4%-6% and 1%-4% this year and next, respectively.

The report also included a so-called risk scenario where global economic conditions worsen further and Russian exports are subject to additional sanctions. If that happens, Russia’s economic recession next year could be deeper than during the global financial crisis in 2009, and growth won’t resume until 2025.

The authorities’ response so far has ensured a softer landing for an economy that analysts at one stage expected to shrink by 10% in the second quarter. Economists at banks including JPMorgan Chase and Citigroup have since upgraded their outlook and now see output falling just 3.5% for the full year.

Even so, the Bank of Russia predicts that GDP will shrink by 7% in the current quarter and possibly even more in the final three months of the year. It estimates that the economy shrank by 4.3% in the second quarter.

The standoff over energy resource shipments to Europe raises new risks for the economy. Monthly cuts in oil output will begin in August, according to the International Energy Agency, which predicts Russia’s crude output will have fallen by about 20 percent by early next year.

“The recession in 2022 will be less deep than expected in April,” the central bank said in a monetary policy report this month. “At the same time, the impact of supply shocks can be more extended over time.”