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Russia at risk of "plunging into economic blackhole" as war costs mount

Journalist: John Choong (Head of Markets and Research), Newspage

ended 06. October 2024

Recent economic data suggests Russia's economy may be in a more precarious position than previously thought. Despite official narratives, the country's GDP growth has slowed significantly, dropping to 2.4% from 3.5% last year. This fell short of expectations of  2.8%. This decline comes alongside an unexpected surge in real wage growth to 8.1%, overshooting projections of 6.0%.

Alongside this, Russia's National Wealth Fund reserves could be depleted as soon as next year, according to research by Fink Money. Fink Money found that, with the current deficit consuming about $40bn annually, this will pile on further financial strain, something further evidenced by Russia's 10-year bond yields reaching levels higher than those  seen during the Global Financial Crisis.

The situation is compounded by ongoing sanctions, particularly affecting gas exports to Europe, and a potential softening in oil prices as Saudi Arabia abandons its $100 oil target. With limited options for financing and a weakening ruble, Russia's economic outlook appears increasingly challenging.

Newspage asked economists, IFAs, and analysts for their thoughts on the current geopolitical situation, the outlook for the Russian economy, and how that could impact energy prices.

4 responses from the Newspage community

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Editor
David Belle
Founder and Trader at Fink Money
Russia's 10-year bond currently yields 15.12%, higher than it was in 2008. This is largely due to the central bank having to hike rates to a whopping 18%, whilst issuing a warning last week that stagflation is a risk, as GDP growth missed expectations at 2.4% vs 2.8%, and real wage growth smashing above 8% vs 6% expected. What's more, their national wealth fund is projected to run out of funds by the end of next year, which could plunge their economy into a blackhole.
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Gabriel McKeown
Head of Macroeconomics at The Sad Rabbit Newsletter
Russia's economic resilience is proving to be a mirage, masking a looming fiscal precipice that threatens to upend the nation's stability. Over the past year, its financial prospects have defied expectations, posting a robust 3.6% GDP growth in 2023, and a further 2.4% Y/Y in August. However, beneath this veneer of resilience lies a precarious economic landscape that threatens its long-term prospects. The underlying growth is largely artificial, driven by massive government spending on the military-industrial complex, with the war becoming the primary engine of Russia's economy. This presents a striking economic paradox, with the conflict simultaneously acting as the country’s greatest hurdle and its primary defender against financial ruin. In essence, the war is acting as both a life support system and a terminal illness for the Russian economy. As the conflict grinds on, the clock is ticking, and the question is not if, but when, the realities will force a reckoning in the Kremlin.
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Anita Wright
Independent Financial Adviser at Anita Wright
I would approach anything published by Western media about Russia, China and similar countries with a healthy dose of scepticism. The narrative that sanctions are severely crippling Russia's economy doesn’t fully hold up, as Russia continues to sell oil to countries like China and India, meaning their exports haven’t been entirely restricted. What we’re seeing instead is Western governments inadvertently harming their own economies, while Russia strengthens its ties with the BRICS alliance, now consisting of over 50 nations. These countries are bypassing the US dollar, trading in local currencies or gold, and potentially laying the foundation for a BRICS currency. Regarding inflation, the major risk lies in potential escalations in the two ongoing wars, which could push oil prices higher. Moreover, some central banks are already cutting interest rates without fully containing inflation, which lends credibility to the idea that a second wave of inflation could be on the horizon.
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Dr. James Fox
Equity Research Analyst at Trade Pass
While Western appraisals of the Russian economy can be overly optimistic, recent data points to slowing GDP growth, surging wages and depleting reserves. All of this is concerning for an economy on a war footing. This economic squeeze, compounded by sanctions and potential oil price softening, reinforces a hypothesis that several analysts have held for some time. This is that Russia can neither afford to win the war — and pay for the rebuilding of eastern Ukraine — or lose.