'Path to oblivion': Ukraine's military gains could worsen Russia's economic problems

‘Path to oblivion’: Ukraine’s military gains could worsen Russia’s economic problems

Russian President Vladimir Putin attends a meeting of heads of member states of the Shanghai Cooperation Organization (SCO) during a summit in Samarkand, Uzbekistan, September 16, 2022.

Ministry of Foreign Affairs of Uzbekistan | via Reuters

Ukraine’s counteroffensive, which has recaptured large swathes of territory occupied by Russia, could deepen Russia’s economic problems as international sanctions continue to hammer its fortunes.

Ukraine’s military has had resounding success in recent weeks, recapturing Russian-occupied territory in the northeast and south of the country. Today, Kyiv hopes to liberate Luhansk in the eastern Donbass region, a key area where one of the two self-proclaimed pro-Russian “republics” is located.

Holger Schmieding, chief economist at Berenberg, said Ukraine’s recent military gains could hit the Russian economy hard.

“Even more so than before, the Russian economy looks set to slide into a gradually deepening recession,” Schmieding said in a note last week.

“The rising costs of a war that is not going well for [Russian President Vladimir] Putin, the costs of suppressing domestic dissent and the slow but pernicious impact of sanctions will likely bring Russia’s economy down faster than the Soviet Union collapsed some 30 years ago.”

Ukrainian soldiers board an armored vehicle in Novostepanivka, Kharkiv region, September 19, 2022.

Yasuyoshi Chiba | AFP | Getty Images

He pointed out that Russia’s main bargaining chip in the face of international sanctions imposed by the West – its influence in the energy market, especially in Europe – was also in decline.

“Although Putin shut down the Nord Stream 1 pipeline on August 31, the EU continues to fill its gas storage facilities at a slightly slower but still satisfying pace,” he noted, adding that even the Germany – which was particularly exposed to Russian supplies – could even approach its storage target of 95% before winter.

Energy issues

The rapid abandonment of Russian energy by Europe is particularly painful for the Kremlin: the energy sector accounts for around a third of Russian GDP, half of all tax revenue and 60% of exports, according to the Economist Intelligence Unit.

Energy revenues fell to their lowest level in more than a year in August, and that was before Moscow cut gas flows to Europe in hopes of forcing European leaders to lift punishments. The Kremlin has since been forced to sell oil to Asia at huge discounts.

Falling energy exports mean that the country’s budget surplus has been heavily depleted.

“Russia knows that it has no more leverage in its energy war against Europe. Within two or three years, the EU will have rid itself of its dependence on Russian gas,” the director told CNBC. EIU Global Forecast, Agathe Demarais.

This is one of the main reasons Russia has chosen to cut off gas flows to Europe now, she suggested, with the Kremlin aware that this threat could carry much less weight in a few years. .

Fall in GDP

The EIU predicts a contraction in Russian GDP of 6.2% this year and 4.1% next year, which Demarais called “huge, by historical and international standards.”

“Russia didn’t experience a recession when it was first placed under Western sanctions in 2014. Iran, which was cut off entirely from Swift in 2012 (which has yet to happen to the Russia), only experienced a recession of around 4% in this year,” she said.

Statistics are scarce on the true state of the Russian economy, with the Kremlin keeping its cards relatively close to its chest. However, Bloomberg reported earlier this month, citing an internal document, that Russian officials fear a much deeper and more persistent economic downturn than their public assertions suggest.

Putin has repeatedly asserted that his country’s economy is facing Western sanctions, while Russian First Deputy Prime Minister Andrei Belousov said last month that inflation would reach around 12-13% in 2022, although below the gloomiest projections offered by global economists earlier in the year.

Russian GDP contracted 4% in the second quarter of the year, according to the national statistics service Rosstat, and Russia raised its economic forecast earlier this month, now forecasting a contraction of 2.9% in 2022 and 0.9% in 2023, before returning to 2.6% growth in 2024.

However, Demarais argued that all visible data “points to a collapse in domestic consumption, double-digit inflation and falling investment”, with the withdrawal of 1,000 Western companies also likely to have implications for “the employment and access to innovation”.

“Yet the real impact of the sanctions on Russia will be felt primarily in the long term. In particular, the sanctions will limit Russia’s ability to explore and develop new energy fields, especially in the Arctic region,” he said. she declared.

“Due to Western sanctions, financing the development of these fields will become almost impossible. In addition, US sanctions will make it impossible to export the required technology to Russia.”

Sanctions “to stay”

European Commission President Ursula von der Leyen delivers the State of the European Union address to the European Parliament, in Strasbourg, France, September 14, 2022.

yves herman | Reuters

“We have cut off three quarters of the Russian banking sector from international markets. Almost a thousand international companies have left the country,” she said.

“Car production has fallen by three quarters compared to last year. Aeroflot is grounding planes because there are no more spare parts. The Russian army is taking chips from dishwashers and refrigerators to repair its military equipment, because there are no more semiconductors. Russian industry is in tatters.”

She added that the Kremlin had “put the Russian economy on this path to oblivion” and vowed that the sanctions were “here to stay”.

“Now is the time for us to show determination, not appeasement,” von der Leyen said.

'Limitless' partnership between Russia and China has limits, professor says

As the Kremlin strives to strengthen security ties after being shunned by the West, a senior Russian official said during a visit to Beijing last week that Moscow considers deepening strategic ties with the China as a key political target. Putin also met Chinese President Xi Jinping in Uzbekistan last week as the two countries touted a “boundless” relationship.

However, several commentators have noted that as Russia’s bargaining power on the world stage wanes, China will hold most of the cards as the two superpowers attempt to strengthen their cooperation.

“In the long term, China will be the only economic alternative that Russia will turn to, but this process will also be tricky, as China will remain cautious about becoming overly dependent on Russian raw materials,” Demarais said. ‘EIU.

#Path #oblivion #Ukraines #military #gains #worsen #Russias #economic #problems

Leave a Comment

Your email address will not be published.