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What Russia’s economic resilience means for the war in Ukraine

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Since the Russian invasion of Ukraine nearly a year ago, attempts have been made to clobber its economy.

Russian businesses have been cut off from vast tracts of the Western world. Its oligarchs have been sanctioned and had their yachts seized. And yet, by almost every measure the Russian economy has weathered the last year much better than almost anyone expected.

“There are clearly signs of a slowdown in the Russian economy,” said Desjardins principal economist Marc Desormeaux. “But things are not quite as bad as feared when this conflict erupted.”

Beyond the staggering human cost of the war, the economic toll is also adding up. Russia is spending trillions of dollars to fund its military, kept afloat by the oil and gas sector, but without the huge surplus it was used to.

While President Vladimir Putin is crowing about Russia’s resilience, some economists are forecasting a shrinking economy to come, squeezing its ability to keep the war machine running.

More resilient than expected

Before the Ukraine invasion of Feb. 24, 2022, Russia provided 40 per cent of Europe’s natural gas. It sold about 25 per cent of Europe’s oil as well.

As the European market closed off, Russia scrambled to find new markets.

“This was a major [question] at the start of this conflict, would Russia be cut off from the global economy?” Desormeaux told CBC News.

“So rather than sending a lot of oil to the E.U. much of it is being sent to India, to China, to Turkey and to other trading partners.”

Russian tankers had to find new customers as Europe cut back on Russian oil and gas, but those trading partners demanded steep discounts. (The Associated Press)

Those new trading partners demanded some heavy discounts from Russia.

But combined with a sharp increase in energy prices, the new markets allowed Russia’s economy to keep a solid footing.

“Thus, even though Moscow needs to heavily discount the price of its crude oil on the global market, its energy sector is still providing windfall revenues for the government to deploy in its war efforts given the break-even price of oil production is relatively low,” wrote BMO’s senior economist Art Woo after Russia posted its third quarter GDP results last fall.

“The truth of the matter is that [the Russian economy] is holding up much better than many originally thought after it was hit with an array of sanctions,” Woo wrote.

But it’s shrinking, slowly

Still, economic activity slowed sharply. The Russian economy officially fell into a recession last fall. In the third quarter alone, GDP shrank four per cent year over year.

The International Monetary Fund says after one bad year, with GDP shrinking 2.2 per cent over 2022, the Russian economy is now poised to stage something of a rebound.

In its annual global economic outlook, the IMF says Russia will avoid a recession this year and expand by 0.3 per cent.

The news was seized on by none other than the Russian president.

“Not only Russia withstood these shocks that had been expected, I mean decline in production, labour market levels — by all indications, a little growth is expected, not only by us,” said Putin.

But not everyone is as convinced as the IMF that Russia has rosier days ahead.

Just consider the official numbers. Russia’s finance ministry says oil and gas revenues may fall by another 24 per cent. And its forecast assumes the price of oil will somehow reach $70 US a barrel (Russian oil is currently trading below $60 US/barrel).

“The Russian economy hasn’t collapsed, but it’s shrinking,” said Mark Manger, professor at the Munk School of Global Affairs and Public Policy at the University of Toronto.

“It’s shrinking slowly. And part of that is that until very recently, the money was still rolling in.”

Manger notes, at current prices and with the steep discounts demanded by India and China, Russia isn’t running a surplus anymore.

 

Russian oligarchs have had their yachts seized and businesses cut off from Western markets. (Davis Ramos/Getty Images)

 

Less rosy forecasts

So, contrary to the IMF forecast, many others say the pain in the Russian economy is only starting. The World Bank is forecasting another three per cent drop in GDP this year. The Organisation for Economic Co-operation and Development (OECD) is predicting a six per cent fall in 2023.

And Manger says the combined impact of dwindling surpluses and an economy slowly creaking to catastrophe changes things considerably.

“So now the Russian state is spending a lot of money on a very expensive war,” said Manger, all while less and less money is coming in.

“Putin’s energy windfall is over,” tweeted Robin Brooks, chief economist at the Institute of International Finance.

He says Russia posted huge account surpluses in 2022. But by the end of January of this year, that surplus had been severely depleted.

“The West has huge power to undermine Russia’s war machine. We can cut the flow of money to Russia and end this war,” posted Brooks.

Desormeaux says Russia still has some national wealth funds it can draw on. What he’s watching for is how sanctions will continue to unfold through this year.

“We probably haven’t seen the full impacts of the various rounds of sanctions in the data, yet, some of these things will take time to materialize,” said the Desjardins economist.

 

Behind the front line in the battle for Bakhmut

 

During a break in fighting in Bakhmut, Ukrainian soldiers give first-hand accounts of how they’ve managed to hold on to the strategically key town even as Russian fighters change tactics and sometimes become more deadly.

Manger says some people somehow expected sanctions would crush the Russian economy and force the government to rethink the war in Ukraine. But he says that’s not how sanctions work.

“Sanctions are ineffective in toppling regimes,” said Manger. “And sanctions are probably ineffective in stopping something like a war in the short term. But in the long run, they can completely devastate an economy.”

Manger says maybe the calculation has shifted and time is now on Ukraine’s side as it can afford to wait and see how bad Russia’s economy will get.

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Mark Carney to lead Liberal economic task force ahead of next election

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NANAIMO, B.C. – Former Bank of Canada governor Mark Carney will chair a Liberal task force on economic growth, the party announced Monday as Liberal MPs meet to strategize for the upcoming election year.

Long touted as a possible leadership successor to Prime Minister Justin Trudeau, Carney was already scheduled to address caucus as part of the retreat in Nanaimo, B.C., this week.

The Liberals say he will help shape the party’s policies for the next election, and will report to Trudeau and the Liberal platform committee.

“As chair of the Leader’s Task Force on Economic Growth, Mark’s unique ideas and perspectives will play a vital role in shaping the next steps in our plan to continue to grow our economy and strengthen the middle class, and to urgently seize new opportunities for Canadian jobs and prosperity in a fast-changing world,” Trudeau said in a statement Monday.

Trudeau is expected to address Liberal members of Parliament later this week. It will be the first time he faces them as a group since MPs left Ottawa in the spring.

Still stinging from a devastating byelection loss earlier this summer, the caucus is now also reeling from news that its national campaign director has resigned and the party can no longer count on the NDP to stave off an early election.

Last week, NDP Leader Jagmeet Singh ended his agreement with Trudeau to have the New Democrats support the government on key votes in exchange for movement on priorities such as dental care.

All of this comes as the Liberals remain well behind the Conservatives in the polls despite efforts to refocus on issues like housing and affordability.

Some Liberal MPs hope to hear more about how Trudeau plans to win Canadians back when he addresses his team this week.

Carney appears to be part of that plan, attempting to bring some economic heft to a government that has struggled to resonate with voters who are struggling with inflation and soaring housing costs.

Trudeau said several weeks ago that he has long tried to coax Carney to join his government. The economist and former investment banker spent five years as the governor of the Bank of Canada during the last Conservative government before hopping across the pond to head up the Bank of England for seven years.

Carney is just one of a host of names suggested as possible successors to Trudeau, who has insisted he will lead the party into the next election despite simmering calls for him to step aside.

Those calls reached a new intensity earlier this summer when the Conservatives won a longtime Liberal stronghold in a major byelection upset in Toronto—St. Paul’s.

But Trudeau held fast to his decision to stay and rejected calls to convene his entire caucus over the summer to respond to their concerns about their collective prospects.

The prime minister has spoken with Liberal MPs one-on-one over the last few months and attended several regional meetings ahead of the Nanaimo retreat, including Ontario and Quebec, which together account for 70 per cent of the caucus.

While several Liberals who don’t feel comfortable speaking publicly say the meetings were positive, the party leader has mainly held to his message that he is simply focused on “delivering for Canadians.”

Conservative House leader Andrew Scheer was in Nanaimo ahead of the meeting to express his scorn for the Liberal strategy session, and for Carney’s involvement.

“It doesn’t matter what happens in this retreat, doesn’t matter what kinds of (communications) exercise they go through, or what kind of speculation they all entertain about who might lead them in the next election,” said Scheer, who called a small press conference on the Nanaimo harbourfront Monday.

“It’s the same failed Liberal policies causing the same hardships for Canadians.”

He said Carney and Trudeau are “basically the same people,” and that Carney has supported Liberal policies, including the carbon tax.

The three-day retreat is expected to include breakout meetings for the Indigenous, rural and women’s caucuses before the full group convenes later this week.

This report by The Canadian Press was first published Sept. 9, 2024.

The Canadian Press. All rights reserved.

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

Here’s a quick glance at unemployment rates for August, by province

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OTTAWA – Canada’s national unemployment rate was 6.6 per cent in August. Here are the jobless rates last month by province (numbers from the previous month in brackets):

_ Newfoundland and Labrador 10.4 per cent (9.6)

_ Prince Edward Island 8.2 per cent (8.9)

_ Nova Scotia 6.7 per cent (7.0)

_ New Brunswick 6.5 per cent (7.2)

_ Quebec 5.7 per cent (5.7)

_ Ontario 7.1 per cent (6.7)

_ Manitoba 5.8 per cent (5.7)

_ Saskatchewan 5.4 per cent (5.4)

_ Alberta 7.7 per cent (7.1)

_ British Columbia 5.8 per cent (5.5)

This report by The Canadian Press was first published Sept. 6, 2024.

The Canadian Press. All rights reserved.

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