The Russian economy is set to collapse with the impact of sanctions

Russians Economie It is poised for collapse this year after the United States and its European allies hit the Kremlin with a series of crippling financial sanctions over its unprovoked invasion of Ukraine.

Russian manufacturing activity slumped in March, contracting at the most since May 2020 as companies faced sharp price hikes and a major slump in new orders. Western sanctions have effectively isolated Russia from the international financial system and prevented it from accessing new technology.

Experts believe that this is just the beginning of a major slide in the Russian economy this year.

The Institute of International Finance (IIF), a Washington-based think tank, has estimated that Russian GDP, the broadest measure of goods produced in a country, could fall by 15% in 2022 and 3% in 2023 as a result of sanctions, and eliminating decades of growth. A contraction of this size would be nearly twice as severe as the Russian recession during the global financial crisis in 2008.

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“Further escalation of the war could lead to more boycotts of Russian energy, which would significantly weaken Russia’s ability to import goods and services, deepening the recession,” the Institute of International Finance said in an analyst note last month.

Meanwhile, Goldman Sachs has forecast the economy will contract 10% this year – after previously forecasting growth of around 2% – while Capital Economics expects a 12% contraction. Barclays economists, including Ibrahim Rizkallah, said in an analyst note that the Russian economy could decline by as much as 12.4% in 2022.

“Due to the current geopolitical conditions, we assume that the sanctions will be long-term,” they wrote.

Western allies targeted Russia with severe financial sanctions after the invasion of Ukraine on February 24, including cutting off a major part of Russia’s central bank by preventing it from selling dollars, euros and other foreign currencies in its $630 billion buffer stock; Ban some financial institutions from the Swift messaging system for international payments; and punish hundreds of lawmakers and Russian elites with close ties to President Vladimir Putin.

Moreover, hundreds of Western companies – including Coca-Cola, McDonald’s and Goldman Sachs – moved to cut ties with Moscow after the invasion began as they faced intense pressure from investors and consumers. The pace has intensified as the ongoing fighting in Ukraine has led to a massive humanitarian crisis.

Putin warned that Russia is facing high unemployment and inflation at a time when it is facing international sanctions, which he described as a “lightning economic war.”

Moscow is also on the brink of a historic debt default, according to Moody’s, as it has tried to service its dollar-denominated bonds with rubles. This will be the first time that Russia has defaulted on its foreign debt since the Bolshevik Revolution of 1917.

Russia made an April 4 payment on sovereign bonds in rubles instead of the dollars it agreed to pay under the terms of the securities.

On Thursday, Moody’s said Russia “can therefore be considered a default under Moody’s definition if it is not remedied by May 4, which is the end of the grace period.” Bond contracts do not contain provisions for payment in any currency other than the dollar.

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Finance Minister Anton Siluanov told Russian state media earlier this month that if the Kremlin was forced to default on its debt, it would take legal action.

“We will sue because we have taken all necessary measures so that the investors receive their payments,” Siluanov told the pro-Kremlin newspaper Izvestia. “We will show court proof of our payments, to confirm our efforts to pay in rubles, just as we did in foreign currency. It will not be a simple process.”

It is not clear who will sue Russia.

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