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Russia Avoids A Recession, But It Has Already Begun

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Despite being mired in an attrition battle it didn't foresee six months after encroaching on Ukraine, Russia is succeeding on another front: despite being in a severe recession, its oil-dependent economy is proving to be considerably more durable than anticipated.

Andrey Nechaev, who served as Russia's finance minister in the early 1990s, claims that as he travels around Moscow, the same traffic delays that were present previously are present.

Although China and India's willingness to buy inexpensive Russian oil has helped, Nechaev and other analysts claim that as a result of Western sanctions, Russia's economy has begun to deteriorate and will certainly experience a protracted period of stagnation.

Here's how Russia avoids a recession, but it has already begun according to experts.

A Closer Look

COPYRIGHT_WI: Published on https://washingtonindependent.com/ebv/russia-avoids-a-recession-but-it-has-already-begun/ by Daisy-Mae Schmitt on 2022-08-29T03:07:46.326Z

Russian oil refinery burning fuel
Russian oil refinery burning fuel

Except for a few empty stores where once-dominant Western brands have fled the nation in their hundreds, not much appears to have changed on the surface.

Starbucks (SBUX) cafes are already gradually reopening under the barely covert moniker Stars Coffee, while McDonald's (MCD) is now known as "Vkusno I tochka," or "Tasty, and that's it."

Many people have seen a change, but it's not the one they were expecting as a result of the exodus of Western corporations and the wave after wave of harsh Western sanctions aimed at Russia's essential oil exports and its financial system.

Nechaev, who oversaw the central bank during some of Russia's most difficult economic times and helped manage the country's transition to a market economy, attributes this in part to the bank.

As the West froze almost half of Russia's $600 billion in foreign exchange reserves in the wake of the invasion, the ruble did fall to a record low against the US dollar earlier this year.

But since then, it has recovered to reach its highest level since 2018 against the US dollar.

(Recall President Joe Biden's warning that it would be reduced to "rubble")

The majority of those rate increases and strong capital controls from the spring have since been virtually undone.

Interest rates are currently lower than they were prior to the war, and the central bank projects that inflation, which peaked in April at roughly 18%, will range between 12% and 15% for the entire year.

The central bank has also increased its prediction for the year's GDP, which is now expected to contract by 4% to 6%. An 8% to 10% contraction was anticipated for April.

Additionally, the International Monetary Fund now projects a 6% decline.

As a result of the sanctions put in place by the West after Moscow annexed Crimea in 2014, the Kremlin had eight years to prepare, which was helpful.

Because the central bank has a backup payment system, "the exit of Mastercard and Visa barely had an impact on domestic payments," claims Nechaev.

In 2017, Russia launched the Mir credit card and its own system for handling transactions.

According to Chris Weafer, founding partner of Macro Advisory Ltd, a consulting firm that offers advice to global corporations doing business in Russia and Eurasia, there is a reason why Russians who love McDonald's and Starbucks may still satisfy their cravings for fast food.

Since 2014, a large number of foreign brands have localized some or all of their supply chains in Russia in response to government pressure.

As a result, it was quite simple for Russian buyers to acquire these businesses when they shut down by simply altering the wrapping and packaging.

Weafer says, "Same people, same goods, same supply."

But it's not an absolutely foolproof plan.

When the Russian potato production was insufficient, the rebranded McDonald's restaurants reported a scarcity of French fries in the middle of July.

Sanctions prevented international suppliers from supplying the shortfall.

Can The Energy Boom In Russia Last?

A man working at a Russian oil refinery
A man working at a Russian oil refinery

Consistency in fast food is one thing.

The oil sector in Russia, which is still by far the largest source of government revenue, is crucial to the country's long-term stability.

It would be an understatement to suggest that Russia has so far been shielded by high energy prices.

Russian oil and gas exports to Europe brought in twice as much money between March and July of this year as they have on average in previous years, according to the International Energy Agency.

That's in spite of volume declines.

Gas shipments to Europe have decreased by roughly 75% during the last 12 months, according to IEA data.

A different substance is oil.

The IEA forecast in March that sanctions or the threat of penalties would drive 3 million barrels per day of Russian oil to leave the market starting in April has not come to pass.

Although Rystad Energy analysts note a minor decline throughout the summer, exports have kept steady.

The main contributing component has been Russia's aptitude for locating new Asian markets.

Since the start of the war, the majority of Russia's seaborne oil exports have gone to Asia, according to Houmayoun Falakshali of the commodities consultancy Kpler.

The percentage was 56% in July as opposed to 37% in July 2021.

According to Kpler data, China increased its seaborne imports of deeply discounted Russian Urals crude by 40% between January and July of this year compared to the same time last year.

Despite China's initial attempts to avoid appearing to take a side in Russia's conflict on Ukraine, this is the case.

According to Kpler, seaborne imports from Russia to India have increased by more than 1,700% over that time.

Through a Siberian pipeline, Russia has also been boosting its gas shipments to China.

It will be crucial to see what transpires when Europe's ban on 90% of Russian oil goes into effect in December.

Russian oil production is expected to be suspended at a rate of 2 million barrels per day.

While part of this oil will probably be shipped to Asia, analysts question if demand will be sufficient to satiate the entire amount.

According to Falakshali, China cannot buy much more Russian oil than it already does, due to a domestic decline in demand and simply not needing much more of the precise type of oil Russia exports.

Price will also be key in determining whether Russia can continue to reduce in order to acquire new markets.

"A 30% reduction from $120 a barrel is one thing," Nechaev says. "A discount from $70 is a different story."

While inflation around the world benefits Russia's oil industry, it has a negative impact on the country's citizens.

The conflict in Ukraine has exacerbated the cost of living crisis that Russians have been experiencing for some time, making their situation similar to that of the rest of Europe.

Nechaev is concerned because he was instrumental in guiding Russia through a much more severe economic crisis in the 1990s.

He claims that we have "gone backwards by around 10 years" in terms of the standard of living "if you measure it by real incomes."

Conclusion

Russia is investing money to attempt to stop this.

In May, the government declared a 10% increase in pensions and the minimum wage.

Companies that have "suspended their activity" can now let their employees to temporarily transfer to another company without violating their employment contract.

Airspace bans and sanctions blocking maintenance and the supply of parts by foreign manufacturers have crippled Russian airlines, therefore it is spending 17 billion rubles ($280 million) buying their bonds.

It's technical sanctions, like those hurting the aircraft industry that may have the most dramatic influence on Russia's long-term economic prospects.

Secretary of Commerce for the United States Gina Raimondo reported in June that global semiconductor exports to Russia had dropped by 90 percent since the conflict began.

Experts warn that will cause the country to fall even further behind the rest of the world in the fight to develop cutting-edge technologies, as the halt in manufacturing will affect everything from vehicles to computers.

Weafer predicts that the effects of sanctions will be gradual rather than immediate.

"Russia is now looking at perhaps a protracted period of stagnation."

However, Nechaev is even more conclusive.

He declares, "The economic downturn has begun."

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About The Authors

Daisy-Mae Schmitt

Daisy-Mae Schmitt - Daisy-Mae is obsessed with inventing new ways to create awesome content that's absurdly useful and successful, with over ten years of editorial and inbound marketing experience. She also serves as a reporter, strategist, interviewer, mentor, and therapist for in-house contributors and clients.

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