According to UC Berkeley economist Yuriy Gorodnichenko, the nation’s economy is in deep trouble and is set to enter a damaging recession within a year.
That’s mainly because Russia is losing two things its economy desperately needs, he told Business Insider — a robust energy trade and a steady flow of US dollars.
Moscow’s economy is extremely dependent on petrodollars, or dollars obtained through the oil and gas trade, Gorodnichenko said. Yet, with Russia’s energy flows upended by sanctions, it’s unclear if sales to friendly nations will be enough to prop up the Kremlin’s hefty war budget — or if Russia will have enough access to dollars to readily import all the goods and resources its economy needs to function, he said.
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That could put Russia’s economy on the fast track to a recession in the next 12 months, Gorodnichenko predicted.
“If they have to finance the war and they don’t have this resource, it’s not clear where they will raise this money,” he added. “I predict they’re going to face a very serious recession.”
Withering energy empire
The energy trade is Russia’s biggest money maker. However — thanks, in part, to Western sanctions — Moscow’s oil and gas business has suffered over the last year, with sales plunging 24% to a three-year-low in 2023.
That decline is a big financial problem for the Kremlin. Its war against Ukraine is growing more costly, with the government signing a record military budget for 2024. The nation is set to rack up a deficit of 1.59 trillion rubles, or around $18 billion this year, according to the current exchange rate.
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“You do a back-of-the-envelope calculation, and you very quickly realize that if Russia doesn’t have petrodollars, they’re going to face a very difficult problem,” Gorodnichenko said.
Declining oil sales mean Russia is losing access to the US dollar, as crude transactions are primarily conducted with the greenback.
A smaller pool of dollars to transact with could isolate Russia further from the global economy, given the US currency is the backbone of global trade. The dollar accounted for one side in 88% of all foreign transactions in April 2022, far more than any other currency, according to the latest data from the Bank for International Settlements.
Putin has played up Russia’s independence from the US and its currency, moving to de-dollarize trade and create alternative payment systems with its allies. But those actions are only pushing the nation closer to economic hardship, Gorodnichenko said, especially considering the fact that Russia still imports “just about everything,” from cars to food to furniture and other consumer goods.
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A historical view of Russia’s finances also shows that GDP is highly correlated to how many petrodollars the economy has access to, Gorodnichenko said. Russia fell into a recession during the global financial crisis and later in 2014, when oil prices plunged and lowered the amount of dollars it was able to bring in.
Gorodnichenko also noted that when the Soviet Union lost access to petrodollars, its economy collapsed within five years. He suggested that Russia’s economic decline could occur even quicker, given that the Soviet Union was far more self-sufficient resource-wise than Russia is today.
“If they don’t have petrodollars to pay for all the consumer investment goods, they’re going to face some difficult problems,” Gorodnichkeno said. “Maybe you can get [resources] from China or somebody like that here and there, but globally, it can’t really borrow. And so when you have an adverse shock … the effect is going to be amplified.”
Economists have been warning about the risk of economic calamity for Russia since 2022, when its invasion of Ukraine prompted a barrage of sanctions that upended trade and finance.
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Russia’s economy is becoming increasingly fragile the longer the war drags on, experts have said. Even Putin, who has pushed the narrative of Russia’s resilient economy, has admitted to key weaknesses in the nation’s finances, with the country reeling from sky-high inflation, elevated borrowing costs, and soaring wages.