Economy

Why We Shouldn’t Expect the Russian Economy to Collapse Tomorrow

Published

1 year ago

March 21, 2023

Last week, the head of the International Monetary Fund (IMF) Kristalina Georgieva predicted that sanctions on Russia would have “quite devastating” effects on its economy, which she said would shrink “by at least 7%.” This statement came out of the blue considering that the IMF recalibrated its Russian GDP forecast for 2023 in January, saying the fund expected it to grow by 0.3% instead of falling by a further 2.3%.

Of course, it’s a stretch to call 0.3% growth. However, you don’t expect a country that is struggling under unprecedented sanctions pressure and is spending up to 10% of its GDP to fuel its war effort to boast such statistics. By comparison, Germany’s GDP is expected to go up by just 0.1% over the same period.

This “optimism” regarding the stability of Russia’s economy caused an uproar. The general public did not appreciate the IMF’s attempt to act in an unbiased manner, especially considering that other international institutions kept their forecasts the same: a 3-4% drop in GDP in 2023.

That’s why this time around Georgieva had to send a much clearer signal to the expert community.

The rebukes hurled at the IMF (and even more so, at Rosstat) are mostly justified. But they also expose the fact that those engaging in arguments about the effectiveness of sanctions often indulge in wishful thinking.

Analysts now can be roughly split into two camps. The first group believes that even if the Russian economy is not “torn to shreds” it is still undergoing a major crisis. The collapse was only averted due to efforts made by technocrats in the Russian government and the sluggishness of the West’s sanction machine. Give it a little more time and the noose will tighten.

The other camp — the skeptics — say “sanctions don’t work.” A year later, the Russian economy is yet to implode and still somehow manages to pay the ever-growing expenses of the war. It seems that Vladimir Putin’s regime is as strong as ever, while sanctions turned out to be weaker than market middlemen and the potential beneficiaries of the restrictions, namely India and China.

This point of view has gained traction in the last few months and attracted a response.

The sanctions, of course, are working. Russia’s budget deficit in the first two months of 2023 reached 88% of the total deficit planned for the coming year. The new formula for calculating oil and gas taxes and a “shakeout” of major businesses should improve the situation a little, but even cautious estimates say that the deficit will swell to 5-6 trillion rubles (61.75-74 billion euros) which is a very unfortunate turn of events for a Kremlin that has grown used to having a piggy bank. Unlike 2022, which brought about record-high windfall gains from selling oil and gas, 2023 will be a year of shrinking exports.

Medium-term losses in GDP and the standard of living for Russians will accumulate. The country is now pursuing “regressive import substitution” — a policy that rolls back production to the level of technologies used 20-30 years ago, while consumers are offered outdated goods for higher prices to substitute for the lost imports. The Russian government heralded this course back in 2014 but it has already brought about losses of tens of thousands of rubles for the average Russian family.

But does it mean that the IMF forecasts will definitely not come true, while Georgieva is broadcasting propaganda myths about Russia’s invincibility in the face of sanctions? Not at all.

Firstly, the 0.3% GDP growth can be ushered in through public spending and arms production even while consumption is deeply in the red. Secondly, even if the economy shrinks by a few percentage points, it will not drive the West closer to what they seek: Russia’s military defeat. This is exactly what those who offer a more cautious stance on the destructive nature of sanctions are saying.

Yes, this is an unprecedented blow dealt primarily to consumption. But the Kremlin’s reserves to keep the war going are still significant. The Russian economy has not even moved to the mobilization stage and largely still functions according to the old quasi-market rules.

It does not mean that sanctions are pointless. They do work and their effect is very noticeable. But it’s not the IMF’s fault that the Russian economy is still afloat.

It is crucial to understand that the West’s economic leverage on Russia is not all-powerful and that even once the most effective measures have been implemented, expectations should be kept realistic.

This article was first published in Novaya Gazeta Europe.

The views expressed in opinion pieces do not necessarily reflect the position of The Moscow Times.

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Economy

Energy stocks help lift S&P/TSX composite, U.S. stock markets also up

Published

3 hours ago

September 17, 2024

Anne Joseph

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.

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

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Economy

Canada’s inflation rate hits 2% target, reaches lowest level in more than three years

Published

4 hours ago

September 17, 2024

Anne Joseph

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.

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Economy

Federal money and sales taxes help pump up New Brunswick budget surplus

Published

24 hours ago

September 16, 2024

Anne Joseph

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.

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