A year of war causes a major shift in Russian economic policy
The attack on Ukraine stopped Russian economic growth in its tracks, bringing in a fog of uncertainty. The invasion increased sanctions and caused many Western firms to leave Russia. As the dramatic economic contraction hit last year, the Russian government responded with radical shift in economic policy that was designed to blunt the harshest recessionary effects. At the end of February 2022, Russia began to quickly abandon the fiscal policies stressed prudence, balanced budgets and deficit reduction. Also abandoned was an exchange rate policy anchored by a freely convertible ruble. The primary aims of economic policy today are minimising the impacts of sanctions and decoupling from the West. The government has made clear that this economic transition cannot be left to market forces.
“A consequence of this war is that the role of the state in the Russian economy and Russian society has increased in many sectors. Large firms, in particular, are increasingly dependent on those in power. Economic policy is now shaped by wartime demands,” explains Laura Solanko, BOFIT’s senior advisor.
Wartime economy means lower growth
BOFIT now sees Russian GDP contracting by 2 % this year. Unless there are dramatic changes in the war or sanctions regime, we expect Russian economic growth next year to be close to zero. Over the medium term, Russia’s economic trends will depend above all on how the war ends.
The biggest risk factor in this forecast is the sustainability of Russia’s public-sector spending. We assume that budget deficits in coming years can be covered without significant difficulties. However, the domestic borrowing for public-sector financing cannot be increased without generating inflationary pressure or side-lining productive private investment.
Russia’s unprovoked invasion of Ukraine has led the Russian government to embrace economic changes that put it on a path towards an autarchic economy. While adjustment to this new normal has widely different implications at the sectoral and individual business level, this structural overhaul will lead to a Russian economy with lower productivity and lower long-term growth potential.
The full text of our latest forecast is posted on our website at https://www.bofit.fi/en/monitoring/forecasts-for-Russia-and-China/latest-forecast-for-russia/
For further information:
Iikka Korhonen, research director, iikka.korhonen@bof.fi, +358 9 183 2272
Laura Solanko, senior advisor, laura.solanko@bof.fi, +358 9 183 2291
The latest BOFIT analyses of the Russian economy are available at our website www.bofit.fi
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