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Homeeurope economy'Floundering, not drowning': Russia's economy is withstanding sanctions onslaught — for now

‘Floundering, not drowning’: Russia’s economy is withstanding sanctions onslaught — for now

  • Moscow is working to recalibrate its economy in the face of a barrage of international sanctions imposed by Western powers in response to the war.
  • The Russian economy shrunk by 4% year-on-year over the second quarter, although this was less sharp than the 5% expected by analysts.
  • Although many economists are focusing on the long-term structural threats to the Russian economy – which the government and central bank are scrambling to counter – the more immediate collapse predicted by some has not come to fruition.

Russian President Vladimir Putin meets with head of Federal Financial Monitoring Service (Rosfinmonitoring) Yury Chikhanchin at the Kremlin in Moscow, Russia June 27, 2022.Mikhail Metzel | Kremlin | Sputnik | via Reuters

Russia's economy contracted in the second quarter – the first full three months since the country's invasion of Ukraine – and economists are divided over whether it can continue to weather the onslaught of international sanctions in the long term.

The Russian economy shrunk by 4% year-on-year over the second quarter, although this was less sharp than the 5% expected by analysts. The Central Bank of Russia expects the downturn to deepen in the quarters ahead, reaching its lowest point in the first half of 2023.

It comes as Moscow scrambles to recalibrate its economy in the face of a barrage of sanctions imposed by Western powers in response to the war, which have disrupted trade and all but ostracized Russia from the global financial system.

"There have been signs of stabilization in many sectors over the past month or two but we don't expect the downturn to bottom out until Q2 2023 and think the economy will stagnate at best thereafter," said Liam Peach, senior emerging markets economist at Capital Economics.

The immediate impact of sanctions was mitigated by swift action from the CBR to deploy capital control measures and hike interest rates sharply. The measures stabilized domestic markets and even saw the ruble become one of the top performing currencies in the world so far this year.

Subsequently, fiscal stimulus measures and substantial cuts to interest rates have also taken effect, blunting the short-term impact of sanctions. Late last month, the central bank shocked with a 150 basis point reduction in Russia's key rate, taking it to 8% and marking the fifth consecutive cut since it launched an emergency hike from 9.5% to 20% in late February.

"The downturn could have been much deeper but the central bank took immediate measures to prevent a financial crisis from taking hold. It also seems that the resilience of Russia's energy sector cushioned the impact of Western sanctions," Peach added.

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