TIPP Insights: Russia braces for a deep recession

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By tippinsights Editorial Board, TIPP Insights

Countries banded together and imposed crippling sanctions on Russia to stymie President Putin’s invasion of Ukraine. Consequently, the International Monetary Fund said that it is very likely that the country will slip into a “deep recession.”

Should the Ukraine war be prolonged and the sanctions strictly imposed, the world’s eleventh-largest economy could collapse or, at the very least, suffer a more extensive crisis than the one it experienced in 1988.

The value of the rouble tumbled as Russian tanks rolled into Ukraine. The Russian currency’s value loss extended to about 22%. The currency weakness has led to a sharp rise in inflation, estimated to be around 14.5% (the highest rate since late 2015). National economics aside, this directly impacts ordinary Russians’ purchasing power.

The steep rise in sugar prices, and rationing imposed in some places as the invasion started, made headlines around the world. According to Russia’s Federal State Statistics Service, sugar prices have risen by about 30% since early March. Though some may be due to seasonal demand, panic buying certainly contributed to the price rise. The fact remains that since the start of the war, groceries have become dearer.

The Kremlin is aware that rising food costs will negatively affect the people’s morale and, in turn, their support for the invasion. While the West is counting on such a scenario, Moscow is doing its best to ensure that the food supply is maintained.

More than half (55%) of Russians in a recent survey said economic sanctions had “started to affect me or people I know.”  Nearly 7 in 10 (69%) said they supported the military operation despite the sanctions. On the economy more generally, nearly one-third thought life for ordinary Russians had got worse over the last 20 years.

Moscow had set aside a stability fund to insulate the Russian economy from shocks in the commodity markets, which is now being used to shore up the rouble. The updated ‘Food Security Agenda’ has increased the country’s self-sufficiency in grains, meat, dairy, and other staples. Since attacking Ukraine, the government has allocated 25 billion roubles to ensure agricultural production. Yet, reports of stock of essential items running low have made it to social media.

Despite all these measures, a weak rouble will drive up the cost of production, thus driving up the price of the products. Imports from friendly allies like Belarus or China will invariably be dearer. The focus, at present, is to ward off bankruptcies and continue production. The strategy has a two-pronged impact. One, it ensures employment, and the second, food security.

Measures taken by the Russian regime over the years to insulate its economy from the global markets may not be able to withstand the harsh sanctions. Despite the doubling of interest rates to 20% in March, the demand for euros and dollars is rising. Moscow is also planning to buy billions of dollars worth of Russian shares to support the stock market, which plunged in the wake of the Ukraine invasion.

In the current scenario, the likelihood of Moscow defaulting on debt payments is highly likely. With exposure to Russian banks estimated to be around $120 billion, this may not deeply impact global markets.

President Putin’s threat to seize assets of multinational corporations that leave Russia in protest or his plans to sell natural gas to “unfriendly” countries in roubles may not be enough to shield his people from the crushing sanctions of the West.

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