New sanctions start to bite in Russia as Moscow admits deficit impact

Russian President Vladimir Putin speaks during a news conference after the meeting of the State Council on Youth Policy in Moscow, Russia, December 22, 2022.

Sergey Guneev Sputnik | Reuters

The latest round of Western sanctions against Russia’s aggression against Ukraine has begun to pinch the country’s economy.

Russian Finance Minister Anton Siluanov told reporters on Tuesday that oil price caps imposed by major G-7 (Group of Seven) economies as well as the European Union and Australia would squeeze Russian export earnings and increase Moscow’s budget deficit. 2% more than expected next year.

Deputy Prime Minister Alexander Novak said on Friday that price caps on Russia’s crude and refined oil exports would cut Kremlin output by 5% to 7% next year, RIA news agency reported. However, officials have suggested that Moscow could finance the deficit through domestic bond issuance and its rainy day fund.

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All 27 EU countries agreed in June to ban purchases of Russian crude from December 5.

“It is still too late to fully assess the impact of the G7 oil price ceiling and the EU’s ban on Russian crude imports coming into effect on December 5, but early signs are that Russia’s economy is starting to feel the pullback,” said Nicholas Farr. , an emerging Europe economist on capital economics.

“Russian oil exports have fallen since sanctions were introduced and the spread between Urals oil prices and Brent crude prices widened to a six-month high, high-frequency data showed. [last] week.”

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Farr suggested that this would increase the impact on Russia’s energy revenues due to the fall in global prices in recent months. Brent crude, the international benchmark, fell from a peak of around $98 a barrel in October to around $77 earlier this month, recovering to around $84.50/bbl in Europe on Tuesday morning.

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Meanwhile, the Russian ruble fell nearly 10% against the dollar last week, becoming the worst-performing EM currency after beating expectations for much of the year.

Farr suggested that a key effect was a weaker ruble, which would put upward pressure on inflation due to higher import costs. After the Bank of Russia (CBR) ended its interest rate cuts in October and kept its monetary policy unchanged in December, it warned that inflation risks “prevail” over inflation.

Farr suggested that if the ruble continues to fall in 2023, the CBR may be forced to reintroduce rate hikes to keep inflation under control, and Capital Economics believes the erosion of Russian resilience to Western sanctions will emerge as a key theme. 2023.

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“Russia has benefited significantly from boosting its terms of trade from higher commodity prices in 2022, but… this support for the economy now appears to be fading,” Farr said in a note on Friday.

“We think Russia’s economy will experience another contraction in 2023. Meanwhile, falling energy revenues will mean that Russia’s balance sheet will come under pressure.”

Capital Economists expects the current account surplus to “shrink rapidly in the coming months,” as it has been a mainstay of the Russian economy this year.

“There is a high risk of requiring a major external restructuring from 2024 onwards, which will keep growth very sluggish,” Farr added.


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