Russia’s economy will shrink 10% this year as Western sanctions hit its exports and imports, Goldman Sachs said.
Inflation in Russia will soar to 20% by year’s end, far above the central bank’s 4% target, it said.
The US and its allies have hamstrung Russia’s economy with sanctions since its invasion of Ukraine.
Goldman Sachs has predicted the Russian economy will shrink by 10% this year, and inflation will skyrocket to 20% —a painful echo of the country’s dire situation in the 1990s.
Western sanctions on Russia’s trade, imposed over its war with Ukraine, will cause exports to drop 10% and imports to tumble 20%, the bank’s economist Clemens Grafe said in a note published Saturday.
Restrictions on financial activities and the withdrawal of Western companies from Russia will also whack its economic growth, according to Goldman.
The Wall Street bank now thinks Russia’s gross domestic product will contract by 10% in 2022, compared with the 7% downturn it previously expected. Before the invasion, its economists expected GDP to grow 2%.
That situation, if it plays out, would mark Russia’s worst contraction since the early 1990s, according to World Bank data. Its economy all-but imploded in that chaotic period after the collapse of the Soviet Union.
It would dwarf even the 7.8% contraction seen in 2009, during the global financial crisis.
Much of the economic pain will stem from sanctions slapped on Russia by the US and its allies. They have banned a handful of its major banks from Swift — a messaging system crucial to global payments — and have cut its central bank off from about half its roughly $640 billion in foreign currency reserves.
More recently, G-7 countries have said they’ll end normal trade relations with Russia, revoking the “most favored nation” status that allows it to trade on preferential terms under World Trade Organization rules. The US has also banned the import of fossil fuels from the major commodities producer.
“Details on the restrictions on Russia’s import side are still scarce, but they are likely to be significant,” Grafe wrote.
Russia will also have to deal with inflation of 20% by the end of the year, according to Grafe. Prices have been rising sharply, and the situation is likely to be worsened by a plunge in the value of the ruble, which makes imports more expensive.
The Russian central bank has hiked interest rates to 20%, and the government has restricted international money transfers, in an effort to tame inflation and avert a full-blown currency crisis. Its target inflation rate is 4%.
However, Russia is set to benefit from the surge in commodities prices unleashed by its war in Ukraine. It will still see growth in its trade surplus despite the sanctions, thanks to its position as a major commodities exporter, Grafe said.
“The surplus of FX resources originating from the trade balance should in our view put the CBR in a position where in principle it can gradually remove capital account restrictions,” he wrote. The CBR is Russia’s central bank.
Read more: Wladimir Klitschko is fighting on the front line to defend Ukraine. The head of the boxing legend’s $100 million family office breaks down his value investing philosophy – and why he focuses on disruptive tech and commodities in particular
Read the original article on Business Insider