(Bloomberg) — Russia’s economy has staggered through the first full month of the war with Ukraine but it may yet emerge with a sparkling balance sheet if some of its biggest trade partners don’t turn off the tap on its exports of energy.
For all the hardships visited on consumers at home and the financial chokehold put on the government from abroad, Bloomberg Economics expects Russia will earn nearly $321 billion from energy exports this year, an increase of more than a third from 2021. It’s also on track for a record current-account surplus that the Institute of International Finance says may reach as high as $240 billion.
“The single biggest driver of Russia’s current account surplus continues to look solid,” IIF economists led by Robin Brooks said in a report. “With current sanctions in place, substantial inflows of hard currency into Russia look set to continue.”
The calculus may change completely, however, in case of an embargo on energy sales. And even without it, Russia’s oil exports and output are already falling, with the International Energy Agency predicting it may lose nearly a quarter of its crude production this month.
Many of the country’s traditional customers are also looking elsewhere and choosing not to sign new contracts for Russian supplies amid widespread condemnation of President Vladimir Putin’s aggression. Others like India are getting steep discounts.
The invasion of Ukraine has shocked Germany and its European Union allies into a radical shift in energy policy, and the bloc is rushing to cut its dependence on Russia. For now, Europe’s largest economy opposes sanctions or political pressure that would prompt a full energy embargo. Only a handful of nations — including the U.S. and the U.K. — have imposed explicit bans on imports from Russia.
Oil and gas account for about half of Russia’s exports and contributed around 40% to last year’s budget revenue.
What Bloomberg Economics Says…
“Hydrocarbon revenue is a lifeline for Russia’s economy, helping to damp the impact of otherwise severe sanctions and stave off a balance-of-payments crisis. But even without an energy embargo, inflation is soaring and a deep recession looms.”
–Scott Johnson.
Still, the combination of a steep ruble depreciation and a higher dollar price for oil will generate an extra 8.5 trillion rubles ($103 billion) in budget revenue this year, according to TS Lombard.
“The Finance Ministry will use some of it to cushion the blow but cautiously, not to spark inflation further,” said Madina Khrustaleva, an analyst at TS Lombard in London. “It seems that all these sanctions will destroy the non-energy part of the economy. Russia will depend on energy even more.”
Although the showdown over Ukraine has rattled energy shipments, the shock to imports and domestic demand will be so severe that the current account, the broadest measure of trade and services, may hit a new historical high after last year’s record $120 billion.
Goldman Sachs Group Inc., whose upward revision for the current-account surplus this year puts it at $205 billion, says it may be enough for the Bank of Russia to meet the private sector’s demand for foreign exchange and allow it eventually to loosen capital controls.
With Russian consumers already caught in a barrage of shocks from inflation to a hollowing out of incomes, Goldman economists predict a 20% collapse in imports this year, double the expected decline in exports.
A healthy balance sheet won’t save Russia from a deep recession, but it’s helping sustain government spending at a time when the government has no access to international capital markets. TS Lombard analysts said the ruble’s exchange rate is effectively backed by current inflows now that sanctions froze much of the central bank’s currency reserves.
Russia’s ability to sell oil and gas abroad may be the only thing keeping the economy from descending into an even worse financial meltdown.
The IIF, an association of the world’s biggest financial institutions, said an energy embargo by the EU, the U.K. and the U.S. would lead to a contraction of more than 20% in output and may cost Russia as much as $300 billion in export receipts, depending on price swings.
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