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Delayed Effects Of Sanctions Could Prolong Russian Recession

Strong Western sanctions and the steep drop in oil prices have formed a one-two punch that will leave the Russian economy in worse shape than economists had expected, according to a new report by the World Bank.

The document, titled “The Dawn of a New Economic Era?” said it expects Russia’s economy to shrink by 3.8 percent this year if the price of oil stays at $53 per barrel on average. The bank’s previous estimate, issued in December, had called for an economic decrease of 0.7 percent in 2015.

And, the report said, the recession will continue at least one more year, with Russia’s economy contracting a further 0.3 percent in 2016, when the price of oil is expected to rise to only about $57 a barrel.

Related: Oilfield Services Facing Years Of Decline

“The oil price slump and stricter sanctions came late in 2014, so that their impact only began to affect the economy in the final quarter of 2014; the effects are likely to be more profound this year and in 2016,” the World Bank report said.

The average price of oil has plunged since late June 2014 from more than $110 per barrel down to its current price in the low-$50 range, and there’s no evidence that prices will rebound in the near future. That leaves Moscow in a bind to draw up a budget that has, until now, relied heavily and comfortably on generous energy revenues.

The report also showed that World Bank economists expect the sanctions, imposed because of Moscow’s support of Ukrainian rebels and its annexation of Crimea, won’t end anytime soon. The sanctions alone, imposed by the European Union, the United States, Australia and Canada, have barred Russian industry from borrowing from the West and importing technologies for its energy sector.

Related: Energy Stocks May Be A Safe Haven For U.S. Investors

This, of course, means Western banks and energy companies are deprived of doing potentially lucrative business with Russia, but the report said the economic pain is felt more acutely in Moscow. “The isolation from international economic activities, such as trade and bank transactions, which are pivotal to a country’s growth, have proven to be very damaging for the targeted economies even if the sender also suffers to some extent from missed trading opportunities with the sanctioned country,” it said.

All this will combine to increase Russia’s rate of poverty “significantly” for the first time since the economic crises of 1998 and 1999, the report said. The World Bank noted that the poverty rate didn’t rise during the worldwide economic crisis of 2008 and 2009 because Russians enjoyed some growth in disposable income at that time.

But now, the report said, disposable income is expected to decline and inflation is expected to rise. As a result, it said, “[T]he poverty rate will rise to 14.2 percent in 2015 (equivalent to 20.3 million people) and remain there in 2016 (equivalent to 20.5 million).” The poverty rate already had risen slightly from 10.8 percent in 2013 to 11.2 percent in 2014.

Related: Why Putin Doesn’t Need To Pander To The West

Against this series of gloomy forecasts, the World Bank praised the Kremlin and the Central Bank of Russia for its response to the double threats to the country’s economy that helped it avoid an economic recession through 2014.

“The government and the Central Bank moved swiftly; policy responses to both shocks were adequate. The economy was stabilized successfully: The planned switch to a free float of the ruble was advanced to November, and other measures to support financial stability were introduced promptly, including the recapitalization of banks in December.”

But that was in 2014. If the World Bank’s analysis is correct, only a sudden rally in oil prices and actions by Moscow to persuade the West to lift its sanctions could prevent a recession now.

By Andy Tully of Oilprice.com

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