Russia Privately Warns of Deep and Prolonged Economic Damage

According to an internal government report, Russia could face a deeper and longer recession due to the spread of U.S. sanctions and European sanctions, which will impact sectors the country relies on to drive its economy for many years.

The document, the result of months of work by officials and experts trying to assess the true impact of Russia’s economic isolation due to President Vladimir Putin’s invasion of Ukraine, paints a far more dire picture than officials usually do in their upbeat public pronouncements. Bloomberg saw a copy, which was drafted to be discussed at a private meeting with top officials on August 30. It was confirmed by people familiar with its contents.

One of three scenarios from the report predicts that the economy will contract faster next year. The economy may return to prewar levels at the end or earlier of the decade. The “inertial” one sees the economy bottoming out next year 8.3% below the 2021 level, while the “stress” scenario puts the low in 2024 at 11.9% under last year’s level.

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All these scenarios show the increasing pressure on sanctions, with more nations likely to adopt them. Europe’s sharp turn away from Russian oil and gas may also hit the Kremlin’s ability to supply its own market, the report said.

Beyond the restrictions themselves, which cover about a quarter of imports and exports, the report details how Russia now faces a “blockade” that “has affected practically all forms of transport,” further cutting off the country’s economy. The pressure is exacerbated by financial and technological restrictions. According to the report, as many as 200 000 IT professionals could leave the country in 2025. This is the first forecast for the growing brain drain.

According to public statements, the sanctions have had less impact than expected. Officials believe that there has been a contraction of less than 3.3% in 2018 and a smaller one for 2023. Economists outside the country have adjusted their outlooks this year to reflect the economic performance. This is contrary to initial projections that the economy would be in deep recession.

On March 23rd, 2022, a woman gazes at the empty shelves of a Moscow supermarket.

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Russian exports fall

It calls for an array of support measures and additional ease of restriction to bring the economy back to pre-war levels by 2024. The goal is to have the economy growing steady after that. The steps are many of the same ones that were used by the government to encourage investment over the past decade when there was little growth even with sanctions.

Asked about the Bloomberg report early Tuesday in Vladivostok, Economy Minister Maxim Reshetnikov called the forecasts “analytical estimates that we used to calculate what would happen if we don’t resist, don’t do anything,” according to Tass.

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Over the next year or two, the report warns of “reduced production volumes in a range of export-oriented sectors,” from oil and gas to metals, chemicals and wood products. While some rebound is possible later, “these sectors will cease to be the drivers of the economy.”

A full cutoff of gas to Europe, Russia’s main export market, could cost as much as 400 billion rubles ($6.6 billion) a year in lost tax revenues, according to the report. It won’t be possible to fully compensate the lost sales with new export markets even in the medium term.

On March 15, 2022, the logo of Transneft, Russia’s largest oil-pipeline giant is photographed in Moscow.

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Russia’s oil sector hit

According to the report, this will result in a reduction of output, which could threaten Kremlin’s goals of expanding domestic gas supplies. The lack of technology needed for liquefied natural gas plants is “critical” and may hamper efforts to build new ones.

Europe’s plans to stop importing Russian oil products — about 55% of exports went there last year — could trigger sharp cuts in production leaving the domestic market short of fuel, as well.

According to the report, metal producers lose $5.7 billion annually due to restrictions

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If the world economy slips into recession, the report warns, Russia could see exports cut further as it becomes the “swing supplier” on global markets, with demand for its products disappearing first. This could lead to a drop in ruble and an increase in inflation.

On the import side, “the main short-term risk is the suspension of production due to lack of imported raw materials and components.” Over the longer term, the inability to repair imported equipment could permanently limit growth, the report said.

On June 12, 2022, people visited a new fast-food restaurant that was opened in an old McDonald’s in Pushkinskaya square. This is Moscow, Russia. Following sanctions following the invasion of Ukraine, McDonald’s closed its first Russian McDonald’s outlet in Moscow.

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Run out of critical imports

“There are simply no alternative suppliers for some critical imports,” it said.

According to the report, even in agriculture, where Russia has lauded its efforts to replace foreign supplies with key inputs, Russians may be forced to cut their food intake as the supply of essential ingredients decreases.

Restrictions on access to western technology may push Russia a generation or two behind current standards as it’s forced to rely on less advanced alternatives from China and Southeast Asia.

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Report warns that the sanctions may also cause the government to reconsider a variety of development targets Putin has set for himself before the war. These include those for population growth, life expectancy and improving the quality of life.

This report outlines the impact of sanctions on a sectoral level.

  • Imports are a major factor in agriculture: The importation of imported products is responsible for 99% of the country’s poultry production, and 30% of its Holstein milk cow output. Most imports of seeds for staples like potatoes, sugar beets, and aminoacids come from abroad.
  • Aviation: 95% passenger volume is carried by foreign-made aircrafts. Insufficient access to spare parts from abroad could result in a shrinking fleet.
  • Machine-building: only 30% of machine tools are Russian-made and local industry doesn’t have the capacity to cover rising demand
  • Pharmaceuticals: About 80 percent of the country’s production depends on imports
  • Transport: EU-imposed restrictions on road transport have increased the costs of road shipment
  • Communication and IT: Russia could be left without SIM cards by 2025. Russia’s telecommunications sector will likely fall behind the rest of the world in 2022.

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