New sanctions are starting to bear fruit in Russia, with Moscow acknowledging the impact of the deficit

Russian President Vladimir Putin speaks during a press conference after a meeting of the State Council on youth policy in Moscow, Russia, December 22, 2022.

Sergey Gunev | Sputnik | Reuters

The latest round of Western sanctions against Russia for its invasion of Ukraine has begun to cripple the country’s economy.

Russian Finance Minister Anton Siluanov reportedly told reporters on Tuesday The oil price cap imposed by the Group of Seven major countries (G-7), plus the European Union and Australia, is putting pressure on Russia’s export income and is likely to push Moscow’s budget deficit higher than the expected 2% next year.

A cap on export prices for crude oil and Russian oil could force Iraq The Kremlin will cut production by between 5% and 7% next yearThe RIA news agency quoted Deputy Prime Minister Alexander Novak as saying on Friday. However, officials suggested that Moscow would be able to finance the shortfall through domestic bond issuance and its own rain fund.

The 27 countries of the European Union agreed in June to ban the purchase of Russian crude oil from December 5.

“It is still too early to fully assess the impact of the G7 oil price ceiling and the EU ban on imports of Russian crude that came into force on December 5, but initial indications are that the Russian economy is beginning to feel the malaise,” said Nicholas Farr. , an economist from Emerging Europe at Capital Economics.

High-frequency data shows that Russian oil exports have fallen since the sanctions were imposed and the spread between Brent crude prices over Urals oil prices widened to its highest level in six months. [last] week.”

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Farr noted that this would exacerbate the damage to Russia’s energy revenues from lower global prices in recent months. International benchmark Brent crude fell from a peak of around $98 a barrel in October to around $77 earlier this month, rebounding to around $84.50 a barrel by Tuesday morning in Europe.

Meanwhile, the Russian ruble fell nearly 10% against the dollar last week, making it by far the worst-performing emerging market currency after missing expectations for much of the year.

Farr suggested that one of the main consequences of a weaker ruble would be upward pressure on inflation due to higher import costs. the Bank of Russia (CBR) ended a series of interest rate cuts in October and after keeping its monetary policy unchanged in December, Warn that inflation risks ‘prevail’ More than an inflation inhibitor.

If the ruble continues to depreciate in 2023, Farr suggested that Russia’s central bank may have to consider re-raising interest rates in order to keep inflation in check, and Capital Economics believes that eroding Russia’s resilience in the face of Western sanctions will emerge as a major theme in 2023.

There may be a window for negotiations between Ukraine and Russia in the middle of 2023, says O'Hanlon of the Brookings Institution.

“Russia benefited greatly from the enhanced terms of trade from higher commodity prices in 2022, but … that support for the economy now appears to be fading,” Farr said in a note on Friday.

“We believe that the Russian economy will suffer another downturn in 2023. At the same time, lower energy revenues mean that Russia’s balance sheets will come under pressure.”

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Having been one of the main pillars of strength for the Russian economy this year, Capital Economics expects the current account surplus to narrow rapidly in the coming months.

“There is a significant risk that a significant external rebalancing will be required from 2024, which will keep growth very sluggish,” Farr added.

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