The last chronicle published by the American journalist Evan Gershkovic in it Wall Street Journal Before his arrest in Russia accused of espionage, he denounces that “Russian economy begins to collapse” as the invasion of the Ukraine enters its second year it continues and Western sanctions become harsher. “Investment falls, labor is scarce and the budget is reduced”warned Gershkovich in his article released on March 28, one day before his arrest in Yekaterinburg, the fourth largest city in the country.
Gershkovich’s report, co-authored by reporter Georgi Kantchev, warns that revenues in the Kremlin’s coffers are currently on a lower-growth trajectory, likely for the long term, despite the fact that the early months of the war spurred a rise in revenues. oil and natural gas prices that resulted in a “windfall” for Moscow.
He points out that gas and oil, the country’s main exports, have lost important customers and that public finances are under pressure: the ruble has fallen more than 20% against the dollar since November. In addition, the workforce is shrinking as young people are sent to the front lines or flee the country in fear of being called up to fight. As a result, uncertainty undermined business investment.
“The Russian economy is entering a long-term regression,” he said. Alexandra Prokopenkoa former Russian Central Bank official who left the country shortly after the invasion, speaking to Gershkovich.
Although there seems to be no reason to worry in the short term, there are those who warn and demand that the Kremlin take action on the matter immediately. Such is the case of oligarch Oleg Deripaska, who warned that Russia will run out of money in 2024 and asked the Moscow authorities for more predictability. “Next year there will be no money. We will need foreign investors, ”she said categorically at the Krasnoyarsk Economic Forum in Siberia.
Faced with this situation, Russia is increasingly dependent on China, which threatens to make Moscow’s fears of becoming an economic colony of the Asian giant come true, according to Gershkovich..
“Despite Russia’s resilience in the short term, the long-term outlook is bleak: Moscow will become much more inward-looking and overly reliant on China,” he said. Maria Shaginaresearcher at the International Institute for Strategic Studies in London.
While Vladimir Putin believed he could use Russian energy supplies to limit Western European support for Ukraine, governments across the Old Continent are beginning to look for new sources of natural gas and oil. Against this, Moscow is selling its oil at a discount to world prices.
The International Monetary Fund (IMF) calculated that the potential growth rate of Russia it was around 3.5% before 2014, the year it took over the Crimean peninsula in Ukraine. But Gershkovich cautions that, according to some economists, that rate has fallen as low as 1 percent. “For an economy like the Russian one, 1% is nothing; it’s not even maintenance level,” said Prokopenko, a former central bank official.
The Moscow-based Gaidar Institute for Economic Policy added that Russia’s industry is experiencing its worst labor crisis since 1993. And Putin recently declared that labor shortages are hampering military production.
On the other hand, Gershkovich notes that private companies in Russia are adjusting to Western import bans. And he recalls that, before the current sanctions, Moscow had tried to substitute imports with domestic products, but with little success. “It’s a bit like going back to Soviet times and doing everything ourselves,” said Vasily Astrov, an economist at the Institute for International Economic Studies in Vienna. “It will be almost impossible to adequately replace what is missing.”
Ilya Korovenkov, director of Chili Lab, an information technology company, revealed that before the war customers used to order new capabilities and now the work is focused on fixing and improving existing systems. Central bank analysts have defined the situation as a “reverse industrialization”suggesting a reliance on less sophisticated technology.
Gershkovich claims that, in the face of all these changes, the Russian economy is increasingly dependent on the state and that the growth in industrial production now comes from arms factories. And he points to that military production hides the problems. “It is not real and productive growth. This does not develop the economy,” Prokopenko explained.
By 2023, most analysts forecast another fall in GDP in Russia and, according to the IMF, in 2027 economic output will be 7% lower than what was forecast before the war. “Loss of human capital, isolation from world financial markets and difficulties in accessing advanced technology will hamper the Russian economy,” the IMF said. In addition, British Petroleum analysts estimate that Russia’s total oil production, which was about 12 million barrels a day in 2019, will drop to between 7 and 9 million a day in 2035.
And Gershkovich concluded his article with a phrase that the economist Vasily Astrov said when he interviewed him: “We are not talking about a crisis of one or two years. The Russian economy will follow a different trajectory.”
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