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



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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US revises down last quarter's economic growth to 2.6% rate – ABC News



WASHINGTON — The U.S. economy maintained its resilience from October through December despite rising interest rates, growing at a 2.6% annual pace, the government said Thursday in a slight downgrade from its previous estimate. But consumer spending, which drives most of the economy’s growth, was revised sharply down.

The government had previously estimated that the economy expanded at a 2.7% annual rate last quarter.

The rise in the gross domestic product — the economy’s total output of goods and services — for the October-December quarter was down from the 3.2% growth rate from July through September. For all of 2022, the U.S. economy expanded 2.1%, down significantly from a robust 5.9% in 2021.


The report suggested that the economy was losing momentum at the end of 2022.

Consumer spending rose at a 1% annual rate last quarter, downgraded from a 1.4% increase in the government’s previous estimate. It was the weakest quarterly gain in consumer spending since COVID-19 slammed the economy in the spring of 2020. Spending on physical goods, like appliances and furniture, which had initially surged as the economy rebounded from the pandemic recession, fell for a fourth straight quarter.

More than half of last quarter’s growth came from businesses restocking their inventories, not an indication of underlying economic strength.

Most economists say they think growth is slowing sharply in the current January-March quarter, in part because the Federal Reserve has steadily raised interest rates in its drive to curb inflation.

The resulting surge in borrowing costs has walloped the housing industry and made it more expensive for consumers and businesses to spend and invest in major purchases. As a consequence, the economy is widely expected to slide into a recession later this year.

The central bank has raised its benchmark interest rate nine times over the past year. The Fed’s policymakers are betting that they can stick a so-called soft landing — slowing growth just enough to tame inflation without tipping the world’s biggest economy into recession.

Yet as higher loan costs spread through the economy, analysts are generally skeptical that the United States can avoid a downturn. The main point of debate is whether a recession will prove mild, with only minor damage to hiring and growth, or severe, with waves of layoffs.

The financial conditions that led to the collapse of Silicon Valley Bank on March 10 and Signature Bank two days later — the second- and third-biggest bank failures in U.S. history — are also expected to slow the economy. Banks are likely to impose stricter conditions on loans, which help fuel economic growth, to conserve cash to meet withdrawals from jittery depositors.

“The economy ended 2022 with marginally less momentum,” Oren Klachkin and Ryan Sweet of Oxford Economics wrote in a research note. ”Looking ahead, the economy will face the full brunt of tighter credit conditions and Fed policy this year, and inflation is set to stay above its historical trend.”

They added: “We expect a recession to hit in the second half of 2023.”

In the meantime, the job market remains robust and has exerted upward pressure on wages, which feed into inflation. The pace of hiring is still healthy, and the unemployment rate is near a half-century low. The confidence and spending of consumers remain relatively solid.

Thursday’s report from the Commerce Department was its third and final estimate of GDP for the fourth quarter of 2022. On April 27, the department will issue its initial estimate of growth in the current first quarter. Forecasters surveyed by the data firm FactSet have estimated that growth in the January-March quarter is decelerating to a 1.4% annual rate.

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Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 – Bloomberg



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Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023  Bloomberg


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Anomalies abound in today's economy. Can artificial intelligence know what's going on? – The Globe and Mail



All the fuss today is about machine learning and ChatGPT. The algorithms associated with them work well if the future is similar to the past. But what if we are at an inflection point in economic and political conditions and the future is different from the past? Will record profit margins, inflated asset prices and low inflation and interest rates of the past 30 years be an accurate reflection of the future? Is this time different?

Maybe we’re already there. Things do not seem to make sense anymore. Have you noticed that economic indicators seem to have stopped working as well and as predictably as they have in the past?

Here are some examples of the puzzling behaviour of economic statistics of recent months.


An inverted yield curve has historically been a good indicator of recessions. For several months now the yield curve has been inverted and yet the U.S. economy has been adding millions of jobs, leading to an historic low unemployment rate. Employment is booming while the economy at large is not.

Consumer sentiment, as reflected in the University of Michigan surveys, and consumer spending have tended historically to move together. But this time around, while consumer sentiment took a nosedive, consumer spending and credit card balances keep growing, reaching record highs.

Construction employment and homebuilder stocks are rising while housing permits and housing starts are falling. Normally, homebuilder stock prices would reflect the collective wisdom of financial markets about housing activity. Not this time.

Bond markets are expecting inflation to recede to the Fed’s target rate of 2 per cent. In this case, the real interest rate, implicit in the 10-year treasuries yield of between 3.5-4 per cent, is 1.5-2 per cent, which is close to historical averages. But prior to the Silicon Valley Bank debacle, some surveys pegged expected inflation to about 3 per cent going forward. Assuming the real rate is the same, this implied a 10-year treasuries yield of between 4.5-5 per cent. Either the bond market was out of line or forecasters’ inflation models do not work as well as in the past.

And oil prices are around US$70 a barrel despite the recent banking crisis and at a time when the economy is slowing down and believed to be entering a recession. Based on past experience at this point in the business cycle oil prices should be at US$50 or less. But they are not. Which begs the question: What will happen to oil prices when the economy enters a growth phase, especially with the opening of China after the COVID-19 lockups?

And the list of puzzling contradictions goes on. Having said that, someone may argue that the labour statistics, for example, are a lagging indicator and show where the economy was, not where it is going. While this is true, the magnitude of divergence between labour statistics and economic activity is so much higher than they’ve been historically. That makes one wonder what is going on.

It could be that many of these puzzling statistics are the result of “survey fatigue,” as Bloomberg Businessweek calls it. The publication reports that there has been a decline in response rates for many surveys government agencies use to collect economic data.

For example, employer response to the Current Employment Statistics survey, according to the publication, which collects payroll and wage data each month, has declined to under 45 per cent by September, 2022, from about 60 per cent at the end of 2019. The issue here is the non-response bias: that people who are not responding to the survey are systematically different from those who do, and this skews results. Could weakening trust in institutions and governments be behind the decline in response rates in recent years? If this is the case, the problem is serious and difficult to reverse or eliminate.

As a result, machine learning algorithms that need massive and good quality data about the past and assume that the future will look pretty much like the past may not work. Then what? Should we re-examine our old models? Or will human intervention always be required? Machine learning will not be able to replace investor insight and “between the lines” reading of nuanced economic numbers.

George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Ivey Business School, University of Western Ontario.

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