Russia

Facing a severe economic and financial crisis

HIGH RISK for enterprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Last updated in April 2022.

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GDP

USD1483.5bn (World ranking 10, World Bank 2020)

Population

144.1mn (World ranking 9, World Bank 2020)

Form of state

Federation

Head of government

Vladimir Vladimirovich PUTIN (President)

Next elections

2024, Presidential

Abundant natural resources, in particular oil and gas
More than 20 years of continued current account surpluses (including the crisis years 2009, 2015-2016 and 2020)
Low public debt

Geopolitical risks: Russian invasion of Ukraine in February 2022, followed by ongoing severe armed conflict between the two countries. As a result, substantially intensified dispute with the West, including extensive sanctions and counter-sanctions
Far-reaching structural reforms still outstanding
High vulnerability to global oil price shocks
Prone to capital flight
Exchange rate remains vulnerable to volatility and sudden depreciation
Poor rule of law and high level of perceived corruption

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Unprecedented sanctions have resulted in much deteriorated political, economic and business environments…

Following the Russian military invasion of Ukraine on 24 February 2022, governments around the world have imposed sweeping and sizable financial and economic sanctions on the Russian economy and individuals, including partial export embargoes on hi-tech goods exports, sanctions against the largest Russian banks, the removal of multiple Russian banks from the SWIFT messaging system and the freezing of around two-thirds of the Central Bank of Russia’s (CBR’s) foreign exchange (FX) reserves held in G-7 and other Western countries. Counter-sanctions from Russia have included a mandatory conversion of 80% of FX received in business transactions into RUB, very stringent capital controls regarding payments abroad (including sovereign debt service and banning foreigners from selling securities) as well as the nationalization of foreign companies deciding to exit Russia after the start of the war. As long as ceasefire negotiations between Ukraine and Russia remain unsuccessful, further escalation cannot be excluded, which could result in even harsher sanctions and counter-sanctions (including on energy trade). The overall environment for doing business in and with Russia is now very unfavorable.

…and in a deep and lasting economic crisis

Russia is now facing a severe economic crisis, which has resulted in a very dramatic impact on macro-financial conditions. In particular, the exclusion of several Russian banks from SWIFT, the freeze of the CBR’s FX reserves and capital controls have severely impaired trade with Russia, with sanctions affecting up to 50% of the total volume of goods and services.

The RUB depreciated sharply in the first two weeks after the beginning of the war, reflecting heavily restricted convertibility, the prospect of collapsing trade and generally the loss of confidence. The exchange rate hit a peak of RUB143:USD1 on 7 March 2022, a -45% loss in value compared to the pre-war rate. In the six weeks thereafter, the RUB recovered to pre-war levels of less than RUB80:USD1 on the Moscow Exchange, helped by the FX and capital controls, higher oil and gas prices, some monetary tightening and reduced Russian demand for imports (due to the Western sanctions), which implies lower demand for FX. However, the RUB’s appreciation is not necessarily real. If a currency’s trade is severely restricted, its exchange rate does not reflect its market value. Anecdotal evidence suggests that there are different (weaker) exchange rates, for example in the tourism industry for holiday trips abroad, at some exchange offices (which continue to sell FX despite the official ban) and even at Sberbank, Russia’s largest bank. Moreover, the RUB's buying power has been eroded as prices for goods have been hiked, especially for imported goods that are or may become subject to Western sanctions. Hence the theoretical effect of a strengthening currency reining in inflation does not work anymore in full. Headline consumer price inflation nearly doubled in March 2022 and we expect it to average more than 20% in the year as a whole. The RUB exchange rate is likely to weaken again later in the year.

The Russian economy is expected to plunge into a deep recession as a result of the international sanctions. We forecast that real GDP will shrink by at least -8% in 2022 – which compares with a pre-war forecast of +3% – and -3% in 2023. In an adverse scenario where stepped-up sanctions and counter-sanctions include a full bilateral trade embargo covering the energy sector as well, Russia’s economy may contract by -15% or more (in the 12 months following the move into such a scenario).

Fiscal and external positions affected by the crisis but still sustainable

In principle, Russia’s public finances will remain manageable in 2022. However, there is a non-negligible risk that the Russian government will default on its debt payments due – either “voluntarily” by refusing to comply with its interest or principal payments to foreign bond-holders owing to the conflict with the West, or because repayment is technically not possible due to sanctions. We expect the general government fiscal balance to move from a +0.7% of GDP surplus in 2021 to a deficit in 2022 as public spending will significantly rise. There is considerable uncertainty about the fiscal revenue side, mainly due to exchange rate uncertainty, and thus the resulting size of the expected deficit. Since oil and gas receipts account for about one-fourth of government revenues, a strong RUB actually makes selling commodities abroad for FX less profitable because the receipts that the government ultimately get from such exports are RUB-denominated. Public debt stood at 17% of GDP at end-2021. It is likely to rise to 20% or so, but this will still be a relatively low ratio compared to emerging market peers. Moreover, only 18% of public debt is denominated in FX (less then USD60bn). And in the remainder of 2022, less than USD2bn of sovereign FX debt is falling due.

Russia’s current account balance posted a record high of USD122bn in 2021 (equivalent to +6.9% of GDP), followed by a USD58bn surplus alone in Q1 2022. We forecast the annual surplus to rise further as nominal exports will remain large in value due to high oil and gas prices and substantial Western energy imports, which have been largely spared from sanctions so far. At the same time, Russia’s nominal imports will drop sharply as a result of sanctions and suppressed domestic demand. Meanwhile, total external debt in Russia fell from USD480bn (27% of GDP) at end-2021 to USD454bn in Q1 2022 and is projected to decline further as Russian entities are now largely excluded from international financial markets.

Although an estimated two-thirds of Russia’s official FX reserves (excl. gold) are frozen due to Western sanctions against the CBR, the remainder (reserves in CNY and other currencies) plus monthly oil and gas revenues could keep the CBR liquid, for now.

Trade structure by destination/origin

(% of total, annual 2020)

Exports	Rank	Imports
China 14.3%	1	23.2% China
Netherlands 7.3%	2	11.0% Germany
United Kingdom 6.7%	3	5.6% Belarus
Germany 5.4%	4	4.0% Italy
Belarus 4.6%	5	4.0% United States

Trade structure by product

(% of total, annual 2020)

Exports	Rank	Imports
Petroleum, petroleum products and related materials 42.1%	1	9.2% Road vehicles
Iron and steel 7.6%	2	7.9% Other industrial machinery and parts
Non-ferrous metals 6.1%	3	7.0% Electrical machinery, apparatus and appliances, n.e.s.
Coal, coke and briquettes 4.4%	4	4.9% Specialised machinery
Cereals and cereal preparations 3.3%	5	4.9% Telecommunication and sound recording apparatus

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