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.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
