Russian President Vladimir Putin speaks at a news conference after a State Council meeting on youth policy in Moscow, Russia, December 22, 2022.
Sergey Guneev | Sputnik | Reuters
The latest round of Western sanctions against Russia over its invasion of Ukraine has begun to squeeze the country’s economy.
Russian Finance Minister Anton Siluanov reportedly told reporters on Tuesday that an oil price cap imposed by the major G-7 (Group of Seven) economies, as well as the European Union and Australia , pressures Russia’s export earnings and could push Moscow’s budget deficit higher. than the expected 2% next year.
The price caps on Russia’s crude and refined oil exports could force the Kremlin to cut output by between 5% and 7% next year, RIA news agency quoted Deputy Prime Minister Alexander Novak as saying. which was said on Friday. However, Moscow should finance the shortfall by issuing domestic bonds and its monsoon fund, officials suggested.
The 27 EU countries also agreed in June to ban the purchase of Russian crude from December 5.
“It is too early to fully assess the impact of the G7 oil price cap and the EU’s ban on Russian crude imports that came into force on December 5, but initial signs suggest that the Russian economy is starting to to feel the pinch,” said Nicholas Farr, emerging Europe economist at Capital Economics.
“High-frequency data shows that Russian oil exports have fallen since the sanctions were introduced and the spread between Brent crude prices and Urals oil prices has widened to a six-month high. [last] week.”
Farr suggested that this would add to the hit to Russian energy revenues from falling global prices in recent months. International benchmark Brent crude fell from a peak of around $98 per barrel in October to $77 earlier this month, recovering to around $84.50/bbl on Tuesday morning in Europe.
Meanwhile, Russia’s ruble fell nearly 10% against the dollar last week, making it the worst-performing EM currency after defying expectations for much of the year.
Farr suggests that a key consequence of a weak ruble is increased inflationary pressure due to higher import costs. The Bank of Russia (CBR) ended interest rate cuts in October and kept monetary policy unchanged in December, warning that inflationary risks “predominate” over disinflationary ones.
If the ruble continues to fall in 2023, Farr suggests the CBR may be forced to look at re-introducing rate hikes to keep inflation under control, and Capital Economics believes the decline in Russia’s resilience to Western sanctions will emerge as a key theme in 2023.
“Russia has benefited greatly from an improvement in the terms of trade from high commodity prices in 2022, but … this economic support now appears to have disappeared,” Farr said in a note on Friday.
“We think that the Russian economy will suffer another contraction in 2023. Meanwhile, the fall in energy revenues means that Russia’s balance sheets will be under strain.”
Having been a key pillar of strength for the Russian economy this year, Capital Economics expects the current account surplus to “decline rapidly in the coming months.”
“There is a high risk that a large external balance will be needed from 2024, which will continue to grow more slowly,” Farr added.