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'Slower burn.' Russia dodges economic collapse but the decline has started – CNN

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London (CNN Business)Six months after invading Ukraine, Russia is bogged down in a war of attrition it didn’t anticipate but it is having success on another front — its oil-dependent economy is in a deep recession but proving far more resilient than expected.

“I’m driving through Moscow and the same traffic jams are there as before,” says Andrey Nechaev, who was Russia’s economy minister in the early 1990s.
The readiness of China and India to snap up cheap Russian oil has helped, but Nechaev and other analysts say Russia’s economy has started to decline and is likely facing a prolonged period of stagnation as a consequence of Western sanctions.
On the surface, not much has changed, bar a few empty storefronts that once housed Western brands that have fled the country in their hundreds. McDonalds (MCD) is now called “Vkusno i tochka”, or “Tasty, and that’s it” and Starbucks (SBUX) cafes are now gradually reopening under the barely disguised brand Stars Coffee.
The streets of Moscow are as busy as ever.

The streets of Moscow are as busy as ever.

The exodus of Western businesses, and wave after wave of punishing Western sanctions targeting Russia’s vital energy exports and its financial system, are having an impact, but not in the way many had expected.
Nechaev, who presided over some of Russia’s most turbulent economic times and helped steer its transition to a market economy, credits some of this to the central bank.
The ruble did crash to a record low to the US dollar earlier this year in the wake of the invasion as the West froze about half of Russia’s $600 billion foreign currency reserves. But it’s bounced back since to its strongest level against the US dollar since 2018. (Remember President Joe Biden’s threat of reducing it to “rubble”?)
That’s largely the result of aggressive capital controls and rate hikes back in the spring, much of which have now been reversed. Interest rates are now lower than before the war, and the central bank says inflation, which peaked at almost 18% in April, is slowing and will be between 12% and 15% for the full year.
The central bank has also revised up its GDP forecast for the year, and now expects it to shrink by 4% to 6%. In April, the forecast was for an 8% to 10% contraction. The International Monetary Fund also now predicts a 6% contraction.
Moscow had been trying to build a 'fortress economy' since annexing Crimea in 2014.

Moscow had been trying to build a 'fortress economy' since annexing Crimea in 2014.

It helped that the Kremlin had eight years to prepare, spurred by the sanctions the West imposed after Moscow annexed Crimea in 2014.
“The exit of Mastercard, Visa, it barely had an impact on domestic payments because the central bank had its own alternative system of payments,” says Nechaev.
Russia set up the Mir credit card, and its own transaction processing system in 2017.
And there’s a reason Russian fans of McDonalds and Starbucks are still able to get their fast-food fix, says Chris Weafer, founding partner of Macro Advisory Ltd, a consultancy advising multinational businesses in Russia and Eurasia.
Since 2014, many Western brands in Russia caved to government pressure and localized some or all of their supply chains. So when these companies left, it was relatively easy for Russian buyers to buy them and keep running them simply by changing the wrapper and packaging.
“Same people, same products, same supply,” says Weafer.
It’s not an entirely watertight strategy, though.
The re-branded McDonald’s stores reported a shortage of French fries in mid-July, when Russia’s potato harvest fell short, and foreign suppliers wouldn’t fill the gap due to sanctions.

Can Russia’s energy boom continue?

Fast food continuity is one thing. Russia’s longer term stability rests on its energy sector, still by far the biggest source of government revenues.
To say high energy prices have so far insulated Russia would be an understatement.
The International Energy Agency says Russia’s revenues from selling oil and gas to Europe doubled between March and July this year, compared to an average of recent years. That’s despite declining volumes. IEA data shows gas deliveries to Europe are down by about 75% over the past 12 months.
Oil is a different matter. The IEA’s March prediction that 3 million barrels a day of Russian oil would come off the market from April because of sanctions, or the threat of them, has not materialized. Exports have held up, though Rystad Energy analysts note a slight drop over the summer.
The major factor has been Russia’s ability to find new markets in Asia.
According to Houmayoun Falakshali from commodities consultancy Kpler, most of Russia’s seaborne oil exports have gone to Asia since the start of the war. In July, the share was 56%, compared to just 37% in July 2021.
Russian seaborne oil exports to Asia have soared this year.

Russian seaborne oil exports to Asia have soared this year.

Between January and July this year, China increased its seaborne imports of heavily-discounted Russian Urals crude by 40%, compared to the same period last year, according to Kpler data. That’s despite China’s initial efforts to avoid the appearance of taking sides in Russia’s war on Ukraine. India’s seaborne imports from Russia are up more than 1,700% over the same period, according to Kpler. Russia has also been increasing gas exports to China through a Siberian pipeline.
What happens when Europe’s embargo on 90% of Russian oil comes into force in December, will be critical. An estimated 2 million barrels a day of Russian oil will be in limbo, and while it’s likely some of that will go to Asia, experts doubt whether demand will be high enough to absorb it all.
Falakshali says China cannot buy much more Russian oil than it already is, because of a domestic slowdown in demand, and because it simply doesn’t need much more of the specific type of oil Russia exports.
Price will play a critical role, too, in whether Russia can afford to keep discounting to secure new markets.
“A discount of 30% from $120 a barrel is one thing,” Nechaev points out. “A discount from $70 is another matter.”

‘Slower burn’

While global inflation is helping Russia’s energy sector, it’s hurting its people. Much like the rest of Europe, Russians are already suffering a cost of living crisis, made much worse by the war in Ukraine.
Nechaev, who helped steer Russia through a much more dramatic economic collapse in the 1990s, is worried.
“In terms of the standard of living, if you measure it by real incomes, we have gone backwards by about 10 years,” he says.
The Russian government is spending to try to combat this. In May, it announced it would raise pensions and the minimum wage by 10%.
It’s set up a system where employees of companies that have “suspended their activities” can temporarily transfer to another employer without breaking their employment contract. And it’s spending 17 billion rubles ($280 million) buying the bonds of Russian airlines, crippled by airspace bans and sanctions preventing maintenance and the supply of parts by foreign manufacturers.
It’s technology sanctions, like those affecting the airline industry that may have the most profound impact on Russia’s long-term economic prospects. In June, US commerce secretary Gina Raimondo said global semiconductor exports to Russia had collapsed by 90% since the war started. That is crippling production of everything from cars to computers, and will, experts say, put it further behind in the global technology race.
“The impact of sanctions will be more a slower burn rather than a quick hit,” says Weafer. “Russia is now looking at potentially a long period of stagnation.”
Nechaev is even more definitive. “Right now, the economic decline has started,” he says.

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Demand for Aluminum Slows in Another Sign of Troubled Economy – Bloomberg

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Demand for Aluminum Slows in Another Sign of Troubled Economy  Bloomberg



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4 experts explain how to prepare for a new economic reality and protect the most vulnerable – World Economic Forum

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  • Chief Economists are mostly in agreement that the outlook for the economy is bleak and that recession is likely.
  • This new reality will take its toll on inequality and widening societal gaps.
  • Four experts explain how policies might address the immediate crisis with an eye to beefing up resilience in the long term.

The latest World Economic Forum Chief Economists Outlook suggests a global recession is “somewhat likely” and the fallout will take its toll on inequality. Just this week, the OECD put out a similar message in its interim report, warning that recent indicators have “taken a turn for the worse”.

Chief Economists have been nearly unanimous in predicting wages to fail to keep pace with surging prices, with nine in ten expecting real wages to decline in low-income economies in 2022 and 2023, alongside 80% in high-income economies.

This will see a continuing deterioration of household purchasing power compounded by aggregate pressures on basic necessities such as food and energy.

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Chief Economists Outlook September 2022

Image: World Economic Forum

Saadia Zahidi, Managing Director at the World Economic Forum highlights “Growing inequality between and within countries” as the “ongoing legacy of COVID-19, war and uncoordinated policy action.” She says, “With inflation soaring and real wages falling, the global cost-of-living crisis is hitting the most vulnerable hardest. As policy-makers aim to control inflation while minimizing the impact on growth, they will need to ensure specific support to those who need it most.”

We asked four chief economists who took part in the survey which policies they think will protect the most vulnerable and how this new economic reality might be steered to better prepare for the future.

‘Pricing carbon (globally) must play a central role’

Christian Keller, Head, Economics Research, Barclays

The one change I would make to the global economy to better prepare us for the future would be to implement a global carbon pricing mechanism. The earth’s climate is the ultimate ‘tragedy of the global commons’: individual and collective incentives are misaligned, because the price of harmful economic activities does not accurately reflect the true social cost. It results in the over-production of carbon-intensive assets to the ultimate detriment of global welfare.

Pricing carbon emissions – or the internalization of their negative externality – is the first step to solve this ‘market failure’. Increasing their price, dis-incentivizes carbon emissions, while also generating public revenues to compensate groups negatively affected by the transition and/or fund public goods such as low-carbon energy infrastructure.

Such a carbon pricing mechanism would ideally be global in nature, to avoid regulatory arbitrage and cross-border carbon leakage.The principles of such a mechanism are textbook economics, but many more questions arise in practice, including how to determine the true ‘marginal external costs’. Naturally, it would be a discovery process and there would be glitches. However, if one does believe climate change is a threat and that it is caused by carbon emissions, pricing carbon (globally) must play a central role.

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Chief Economists Outlook September 2022

Image: World Economic Forum

‘Build a resilient and sustainable pricing strategy’

Gregory Daco, Chief Economist, EY-Parthenon, USA

The various drivers of economic activity that were previously taken as a given will now warrant much more attention from businesses, investors and consumers. There will be five central tenets to this new paradigm: inflation, labour, supply chain, the cost of capital, and environmental, social and governance (ESG) and sustainability issues.

While the current focus is that inflation is hovering at multi-decade highs in many places around the world, there doesn’t appear to be a broad realization that inflation persistence and volatility are likely to be a key feature of the outlook over the next few years. As such, businesses will need to consider building a resilient and sustainable pricing strategy that is nimble enough to navigate a world where demand will ebb and flow more significantly than in the past few decades. Cost management and productivity gains will likely also have to be central to companies’ holistic inflation strategy.

In an environment, where talent is not just more expensive but is also perceived as more valuable and where pricing power will be limited by softening final demand, business executives will increasingly have to focus on productivity and efficiency gains to offset higher labor costs. This won’t be easy, but it will be central to their success.

Supply chain issues have been a central part of the inflation story of the last few years, and it would be misguided to believe that these issues will dissipate overnight. Businesses will need to build supply chain resilience while being aware of economic, geopolitical and political undercurrents.

The rise in the cost of debt has led business executives to put some investment plans on hold, while the large fluctuations in equity valuations have created a wedge between buyers’ and sellers’ perception of the true value of an asset. In addition, the significant US dollar appreciation against most other currencies has created a new set of considerations for multinationals having to hedge their international exposure and incorporate a new consideration into their organizational and portfolio decisions.

Over the last few years, businesses have increasingly focused on ESG and sustainability issues to create long-term value, develop a sense of purpose, and provide trust and confidence to the market. The last few months have brought about a sense of urgency to these developments.

‘Address structural factors to reduce future vulnerabilities ’

Eric Parrado, Chief Economist; General Manager, Research Department, Inter-American Development Bank

The global inflationary crisis is having profound consequences on the well-being of populations around the world, especially in emerging and developing economies. Estimates for Latin America and the Caribbean suggest that food inflation could increase poverty rates by 1.6 percentage points and extreme poverty by 1.8 percentage points.

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Chief Economists Outlook September 2022

Image: World Economic Forum

Policies should have a short term and long-term focus. In the short-term governments should provide transfers for the poorest populations to compensate increases in food prices. This helps to keep people from sliding into poverty and extreme poverty. Subsidies should be designed and funded carefully to avoid larger fiscal imbalances that could contribute to higher inflation rates.

Long-term policies address structural factors to reduce future vulnerabilities. Investing in agricultural innovation, research and climate change adaptation are key to improving productivity in agro-industries, food system resilience and strengthening food security in the long run.

A greater focus should be placed in climate change mitigating policies to ensure agricultural frontiers are not displaced further, and food supply is not restricted. At the same time, countries can avoid directing scarce fiscal resources to cover the costs of dealing with costly man produced natural disasters.

‘Drive employment opportunity and protection’

Svenja Gudell, Chief Economist, Indeed

Access to good jobs is an integral part of both obtaining and sustaining quality of life and well-being. From a labour market perspective, policies which could dramatically benefit vulnerable populations include: skills-based hiring, pay and wage transparency, second chance hiring, accessibility tools and accommodations, and inclusive and unbiased hiring – to name a few. While some leaders look to a one-size-fits-all policy to address cost of living issues, the truth is this rarely results in the desired outcome. Instead, policymakers must consider both the broader, long-term picture, as well as the unique situation within industries, locations, and individual needs to help close these gaps.

As we face hardships ranging from increased cost of living, global warming, geopolitical tensions, etc., employment opportunity and protection for all is key to future prosperity. The micro and macro benefits of adequate, gainful employment enable an increased quality of life and well-being, opportunity for economic mobility, and benefits to both physical and mental health. Ultimately, on a global scale, we must identify and build on technology that is being used effectively to support workers and ensure that job mobility, continuous learning and access to information are widely available to drive employment opportunities and protection for workers.

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What next for the global economy? 3 experts have their say – World Economic Forum

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License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

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