Russia's economy contracts sharply as war and sanctions take hold

MOSCOW • The Russian economy contracted steeply in the second quarter as the country felt the brunt of the economic consequences of its war in Ukraine, in what experts believe to be the start of a yearslong downturn.

The economy shrank 4 per cent from April through June compared with a year ago, the Russian statistics agency said on Friday. It is the first quarterly gross domestic product (GDP) report to fully capture the change in the economy since the invasion of Ukraine.

It was a sharp reversal from the first quarter, when the economy rose 3.5 per cent.

Western sanctions, which cut off Russia from about half of its US$600 billion (S$823 billion) emergency stash of foreign currency and gold reserves, imposed steep restrictions on dealings with Russian banks and prompted hundreds of major Western corporations to pull out of the country.

But even as imports to Russia dried up and financial transactions were blocked, forcing the country to default on its foreign debt, the Russian economy has proved more resilient than some economists initially expected. The fall in GDP reported on Friday was not as severe as some expected in part because the country's coffers were flush with energy revenue as global oil prices rose.

Russia, a US$1.5 trillion economy before the war started, moved quickly in the days after the invasion to mitigate the effect of sanctions.

The central bank more than doubled the interest rate to 20 per cent, severely restricted the flow of money out of the country, shut down stock trading and loosened regulations on banks. The government also increased social spending to support households and loans for businesses hurt by sanctions.

The measures blunted some of the sanctions' effect. And as the ruble rebounded, Russia's finances benefited from high oil prices.

"Russia withstood the initial sanction shock (and) has been relatively resilient so far," said Mr Dmitry Dolgin, the chief economist covering Russia at Dutch bank ING. But he noted that unless Russia manages to diversify its trade and finances, the economy will be weaker in the long term.

Crucially, the prospects for Russia's energy industry, central to the country's economy, are deteriorating. The United States and Britain have already banned Russian oil imports, and the country's oil output will fall further early next year when the full effect of a European Union ban on imports comes into effect.

Russia would need to find customers for roughly 2.3 million barrels of crude and oil products a day, which is about 20 per cent of its average output in 2022, according to the International Energy Agency.

So far, countries including India, China and Turkey have absorbed some of the lost trade from Europe and the US.

NYTIMES