Commissioned by the Swedish Ministry of Finance, a report by the Stockholm Institute of Transition Economics (SITE) analyses the situation of the Russian economy in the light of the sanctions imposed by Western countries on Russia since its military aggression against Ukraine. Whether it’s Russian GDP growth or the level of inflation, there are valid reasons, in its view, to question the official Russian estimates.
The SITE report shows the extent to which Russia’s economy remains dependent on revenues from its oil exports, while the Kremlin has deployed a ‘shadow fleet’ to circumvent the ceiling on oil prices imposed by the G7 countries at the end of 2022. It noted that any measures to limit Russian oil imports would have a major impact on the country’s public finances and the Russian economy.
The Swedish experts also report “mounting imbalances” in the Russian economy, “with an increasingly inconsistent policy mix of fiscal stimulus and monetary tightening”.
What’s more, “the reserves that have been contributing to the financing of fiscal war expenditures will not last forever and may run out as soon as in a year”, they add. Such a situation will increase the pressure on the Bank of Russia to ease its key rate and, at some point, finance the national budget by printing massive amounts of roubles, with consequences for inflation and the exchange rate.
However, the Swedish institute considers a major economic crisis to be “unlikely in the short term”, even if the accumulation of macroeconomic imbalances, combined with a bleak growth outlook, is increasing the risk of a crisis in the longer term.
“The Russian economy is not as strong as (Vladimir) Putin says”, said Swedish Finance Minister Elisabeth Svantesson, who presented the report to her counterparts in Brussels on Tuesday 5 November. “It is very clear that Russian economy is affected by the sanctions that we have” imposed by Western countries, she added, noting that the Bank of Russia’s interest rate had been set at “21%”. In her view, Russia is lying about the level of inflation and “capital flight is huge”, even more so now than before the war in Ukraine.
Speaking on behalf of the European Commission, Valdis Dombrovskis noted that the Russian economy is “heavily dependent” on military spending and that “central bank reserves are rapidly dwindling”. He noted “difficulties in the manufacturing sector, both in terms of access to payment systems and disruption to the supply chain”. In conclusion, the sanctions against Russia are working, and they must continue to be applied, while combating their circumvention.
See the SITE Institute report: https://aeur.eu/f/e73 (Original version in French by Mathieu Bion)