As Moscow admits to deficit impact, new sanctions are starting to bite Russia’s economy
The current round of Western sanctions against Russia is beginning to pinch the country’s economy over its invasion of Ukraine.
Russian Finance Minister Anton Silauanov reportedly told journalists on Tuesday that an oil price cap was imposed by the G-7 (Group of Seven) significant economies. As a result, the European Union and Australia are confining Russian export income, potentially pushing Moscow’s budget deficit to skyrocket over the expected 2% next year.
Price limits on Russia’s crude and refined oil exports could force the Kremlin to reduce output by 5-7% in 2023, the RIA news agency quoted Deputy Prime Minister Alexander Novak as saying Friday. However, as suggested by officials, Moscow should be able to fund the loss through domestic bond issuance and its rainy day fund.
The EU’s 27 countries also agreed in June to restrict the purchase of Russian crude oil from 5th December.
“The investigation of the impact of the G7 oil price freeze and the EU’s prohibition on Russian crude imports, which went into effect on December 5th, is considered audacious. However, early signs point that Russia’s economy is starting to feel the nip,” said Nicholas Farr, Capital Economics’ emerging Europe economist.
According to high-frequency data, Soviet Russia’s oil sales have dropped significantly since the imposition of sanctions and the spread between Brent crude oil and Urals oil prices reached a six-month high [last] week.”
As Farr suggested, this will multiply the beat to Russia’s energy funds from falls in global prices recently. For example, by Tuesday morning in Europe, international benchmark Brent crude fell from around $98 per barrel in October to approximately $77 recently, improving over $84.50/bbl.
Meanwhile, the Russian ruble shot down almost 10% against the dollar last week; This was the worst-performing EM currency after breaking expectations for much of the year.
Farr suggested a necessary result of a collapsing ruble will be higher pressure on inflation due to higher import costs. As a result, in October, the Bank of Russia (CBR) ended its interest rate reduction and, upon keeping its monetary policy constant in December, advised that inflationary risks “overcome” disinflationary ones.
Farr suggested that the CBR may be compelled to look at reintroducing rate hikes to keep inflation under control if the ruble keeps falling next year, and Capital Economics believes the corrosion of Russian flexibility to Western sanctions will emerge as a critical topic of 2023.
“The Soviet Union has endorsed significantly more than simply raising its commercial terms due to rising commodity prices this year, and yet financial system support now appears to be waning” Farr wrote in a note Friday.
“We believe that the Russian financial system will face another downturn in the coming year. Meanwhile, falling energy revenues means Russia’s balance sheets will strain.”
Having been a critical pillar of strength for the Russian finances this year, Capital Economics expects the current account surplus to “reduce rapidly in the coming months.”
Farr added, “There’s a significant risk that a large external rebalancing is needed from 2024, which will lag growth,”.
- Published By Team Nation Press News