Russia braces for deep recession amid corporate exodus

With the Russian ruble sinking to fresh lows and global companies exiting the market, forecasts of a looming collapse of the $1.7 trillion Russian economy have grown since the Kremlin launched its military attacks on Ukraine less than two weeks ago.

The Russian currency fell by more than 10% from Friday to 137 to a dollar on Monday, underscoring the impact of the sanctions imposed by Western nations on the Russian economy and on residents’ living standards.

In 2021, the country’s gross domestic product rose 4.7% year over year, boosted by the global economic recovery and the global surge in the prices of oil, one of Russia’s key commodities. GDP rebounded last year — after contracting 2.7% in 2020 — to the fastest since the 2008 global financial crisis.

Russia GDP

Worst recession in three decades

But with the developments surrounding Russia’s war with Ukraine, many economists are predicting a recession that could be worse than the 1990s in the aftermath of the Soviet Union’s collapse. Analysts at JP Morgan expect Russia’s GDP to shrink 11% this year, sharper than the 5.3% contraction in 1998 after the country’s debt crisis.

Russia’s economic crash of 1998 was triggered by a drop in productivity, the high exchange rate between the ruble and foreign currencies, and the government defaulting on its domestic debts.

Financial watchers are now projecting another 1998-like scenario as Russia is poised to miss its debt deadlines after being cut off from virtually the entire global payments system and losing customers on its key commodities like oil.

Russia in state of default

“Investors are questioning Russia’s willingness to pay. Hence there has been an exodus, especially as Russian debt is also on index-watch,” ING Bank economist Padhraic Garvey said in a note last week, adding that the Russian dollar bond curve is now priced “as if in a state of default.”

Russia on Sunday said its payments of sovereign bonds will depend on sanctions imposed by Western governments, sparking fears of a technical default on the country’s debts.

Uncertainties spur corporate boycott

The mass exodus of global companies from the Russian market is also expected to weigh on the economy as companies attempt to safeguard their staff from the conflict and to support international measures to isolate and disarm Russia.

Companies from the automotive, aviation, technology, consulting, media, retail and energy sectors have already disclosed plans to either suspend operations or exit the Russian market entirely in a form of protest against Vladimir Putin’s decision to wage war on Ukraine and due to uncertainties in doing business in the market.

Consumer goods and services firms including PayPal (NASDAQ:PYPL), Ford Motor (NYSE:F), Volkswagen (FRA:VOW), Toyota Motor (NYSE:TM), Boeing (NYSE:BA), Airbus, Diageo (NYSE:DEO), Apple (NASDAQ:AAPL), Samsung Electronics (KRX:005930), Walt Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX), as well as oil majors BP (NYSE:BP), ExxonMobil (NYSE:XOM) and Shell (NYSE:SHEL) are among the companies that have decided to sever their ties with Russia.

Wooing foreign firms to stay

In an attempt to retain its relationship with foreign companies, Russia on Friday offered fast-tracked bankruptcy protections and the option for firms to hire local managers to manage their stakes in the country until they choose to return.

“To enable businesses to make informed decisions, a draft presidential decree has been prepared to introduce temporary restrictions on exiting Russian assets… We expect that those who have invested in our country will be able to continue working here,” Russian Prime Minister Mikhail Mishustin was quoted as saying by state news agencies TASS and RIA.

Eroding living standards

Putin’s actions are also predicted to result in hyperinflation, elevated unemployment levels and social unrest. To mitigate the global sanctions’ impact on the local currency, the Russian central bank in an emergency move last week hiked its key interest rate to 20% from 9.5% as it prepares for hyperinflation.

With many foreign companies choosing to discontinue their operations in the country, Russians are now preparing to cover the costs of the war as they face worsening unemployment figures and skyrocketing consumer prices.

Oxford Economics’ chief global economist Innes McFee last week said Russia’s unemployment rate will likely rise by 1.9 percentage points in 2023, while inflation is predicted to soar to 20%, eroding residents’ quality of living. The country’s GDP is predicted to contract 11% in the fourth quarter of 2022 as Russia is tipped to suffer the worst economic impact from the war, McFee said.

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