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Shoppers in Moscow. The Russian economy has proved more resilient to sanctions than some economists initially expected, but experts now predict a downturn.Credit...Yuri Kochetkov/EPA, via ShutterstockBy Eshe Nelson and Patricia Cohen
Reporting from London.Aug. 12, 2022
The Russian economy contracted steeply in the second quarter as the country felt the brunt of the economic consequences of its war in Ukraine, in what experts believe to be the start of a yearslong downturn.
The economy shrank 4 percent from April through June compared with a year earlier, the Russian statistics agency said on Friday. It is the first quarterly gross domestic product report to fully capture the change in the economy since the invasion of Ukraine in February. It was a sharp reversal from the first quarter, when the economy grew 3.5 percent.
Western sanctions, which cut off Russia from about half of its $600 billion emergency stash of foreign currency and gold reserves, imposed steep restrictions on dealings with Russian banks and cut access to American technology, prompting hundreds of major Western corporations to pull out of the country.
But even as imports to Russia dried up and financial transactions were blocked, forcing the country to default on its foreign debt, the Russian economy proved more resilient than some economists had initially expected, and the fall in G.D.P. reported on Friday was not as severe as some had expected in part because the country’s coffers were flush with energy revenue as global prices rose.
Analysts, though, say the economic toll will grow heavier as Western nations increasingly turn away from Russian oil and gas, critical sources of export revenue.
“We thought it would be a deep dive this year and then even out,” Laura Solanko, a senior adviser at the Bank of Finland Institute for Economies in Transition, said of the Russian economy. Instead, there has been a milder economic decline, but it will continue into next year, putting the economy in a shallower recession for two years, she said.
Russia, a $1.5 trillion economy before the war started, moved quickly in the days after the invasion to mitigate the impact of sanctions. The central bank more than doubled the interest rate to 20 percent, severely restricted the flow of money out of the country, shut down stock trading on the Moscow Exchange and loosened regulations on banks so lending didn’t seize up. The government also increased social spending to support households and loans for businesses hurt by sanctions.The measures blunted some of the sanctions’ impact. And as the ruble rebounded, Russia’s finances benefited from high oil prices.“
Russia withstood the initial sanction shock” and “has been relatively resilient so far,” said Dmitry Dolgin, the chief economist covering Russia at the Dutch bank ING. But, he noted, unless Russia manages to diversify its trade and finances, the economy will be weaker in the long term.Retail trade declined about 10 percent, the statistics agency said, while wholesale business activity fell 15 percent.
Michael S. Bernstam, a research fellow at the Hoover Institution at Stanford University, said the data released on Friday were in line with other reports from Russia. He, too, expects the economy to deteriorate in the second half of this year, and then again in 2023.
Filling up in St. Petersburg. ...Anatoly Maltsev/EPA, via Shutterstock
As the war drags on, many countries and companies will look to permanently end relationships with Russia and its domestic companies. Businesses will have trouble getting replacement parts for Western-made machines, and software will need updates. Russian companies will need to rearrange their supply chains as imports seize up.