The Russian economy is on the brink of recession

Analyzes on the real health of the Russian economy abound. According to economist Yuriy Gorodnichenko of the University of California at Berkeley, the country’s economy is in serious trouble and risks entering a dramatic recession within a year.

Putin’s claims that the Russian economy is coping well with war and sanctions may therefore prove difficult to sustain very soon. If on the one hand, the restrictions imposed by the West on Moscow’s finances and its energy revenues have not hit the state coffers so deeply and completely, on the other the so-called Russia’s war economy is not resolving economic problems.

Russia is losing two things its economy desperately needs, the economist reported: solid energy trade and a steady flow of US dollars. For this reason, a recession may not be that far away.

Russian economy recession is here, here’s why

Moscow’s economy is extremely dependent on petrodollars, or dollars obtained through oil and gas trade, Gorodnichenko pointed out in his analysis.

However, with Russia’s energy flows disrupted by sanctions, it is unclear whether sales to friendly nations will be enough to support the Kremlin’s large war budget, or whether Russia will have enough access to dollars to promptly import all the goods and the resources its economy needs to function.

“This could tip the Russian economy into a recession in the next 12 months ,” Gorodnichenko predicted.

On the other hand, energy trade is the main source of income for Russia. Hit in part by Western sanctions, Moscow’s oil and gas business has suffered over the past year, with sales down 24% to a three-year low in 2023.

“If they have to finance the war and they don’t have this resource, it’s not clear where they will get this money,” he added. “I predict they will go into a very serious recession.”

The nation is set to rack up a deficit of 1.59 trillion rubles, or about $18 billion this year, according to the current exchange rate. “If you do a rough calculation, you quickly realize that if Russia did not have petrodollars, it would face a very serious problem,” the economist said.

The US dollar, now seen as an enemy of the Russian economic system, is not easily replaceable. Russia risks a serious crisis.

Without petrodollars will Russia sink into crisis?

The decline in oil sales implies that Russia is losing access to the US dollar, as crude oil transactions are mainly conducted in this currency.

A small amount of dollars to transact with could further isolate Russia from the global economy, given that the US currency is the backbone of global trade. The dollar accounted for a share in 88% of all foreign transactions in April 2022, far more than any other currency, according to the latest data from the Bank for International Settlements.

Putin emphasized Russia’s independence from the United States and its currency. But these actions are only pushing the nation into greater economic difficulty, Gorodnichenko stressed, especially because Russia still imports almost everything, from cars to food, furniture, and other consumer goods.

Gorodnichenko also noted that when the Soviet Union lost access to petrodollars, its economy collapsed within five years. He suggested that Russia’s economic decline could occur even more rapidly, given that the Soviet Union was much more self-sufficient in resources than Russia is today.

“Maybe you can get [resources] from China or someone like that here and there, but globally, it can’t really borrow. And so when you have a negative shock… the effect will be amplified”, the expert warned.

Economists have been warning of the risk of an economic catastrophe for Russia as early as 2022 when its invasion of Ukraine triggered a series of sanctions that have upended trade and finance. The Russian economy is becoming increasingly fragile as the war drags on. Its collapse may indeed be imminent.

Original article published on Money.it Italy 2024-08-01 12:31:04. Original title: Ti spiego perché l’economia russa è vicino alla recessione