From one crisis to another: Russia's economy can't catch its breath

Tensions between NATO and Russia have reached boiling point yet again in recent months, due to the country’s longstanding spat with Ukraine. Russia has surrounded the Ukrainian border with roughly 100,000 troops, forcing a bilateral meeting with the U.S. in Geneva this week in an attempt to deescalate tensions. ​The U.S. authorized significant military aid to Ukraine in December and has said it will levy fresh sanctions on the Kremlin if it invades. Although it still remains uncertain whether Putin will order an invasion, Russia appears to have made a significant investment, laying the ground work for a large-scale military operation. 

This comes just months after Covid-19 ran rampant through Russia, with new cases and deaths hitting record highs in November. This led authorities to reimpose some restrictions and consequently weighed on economic sentiment. Moreover, inflationary pressures have continued to mount, hitting the joint-highest level in nearly six years in December, while the Central Bank raised its key policy rate by a massive 425 basis points in 2021.  

Our Consensus Forecast consisting of 47 professional analysts sees GDP growth clocking in at 2.6% this year. Stronger oil production, in line with OPEC+’s decision to phase out output curtailments, should propel export growth and the energy sector more broadly. That being said, the latest geopolitical tensions could spell trouble for an already wobbly economic recovery and further impact the outlook. In particular, potential U.S. sanctions—especially if they hit the Nord Stream 2 pipeline or ban Russia from the international payment settlement system SWIFT—could weigh heavily on investment. 

Insights from Our Analyst Network

Commenting on the current political tensions, analysts at HSBC noted: 

“Geopolitical risks are on the rise as the U.S. administration recently said it would consider introducing additional sanctions in the event of fresh conflict with Ukraine. There is no clarity on which specific sanctions might be on the table, but restrictions on the purchase of local and foreign-currency debt in the secondary market, if they materialized, would be one of the more economically meaningful. If such a risk scenario materialized, Russia’s twin surpluses and high FX reserves are important buffers that could help absorb the shock.” 

Furthermore, commenting on Russia’s economic resilience in the face of rising geopolitical tensions, Sébastien Barbe, an economist at Credit Agricole, said:  

“Another source of concern has intensified over the past few weeks: geopolitics. Tensions between Russia and Ukraine, and uncertainty about the U.S. reaction, should continue to weigh on Russia and the RUB outlook looking forward. Interestingly, Russia has long taken into account its specific geopolitical backdrop when setting its economic policy. It has actually increasingly used financial orthodoxy as a geopolitical shield over recent years. By controlling the government finance imbalances and debt and by being serious about controlling inflation, it has managed to reduce vulnerability to capital flows and to possible sanctions.” 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Steven Burke, Economist

Date: January 13, 2022