Ukraine Estimates a Vastly Greater Number of Russian Casualties in Crimea Explosions!

The Russian economy contracted steeply in the second quarter as the country felt the brunt of the economic consequences of its war in Ukraine, in what experts believe to be the start of a yearslong downturn.

The economy shrank 4 percent from April through June compared with a year earlier, the Russian statistics agency said on Friday. It is the first quarter gross domestic product report to fully capture the change in the economy since the invasion of Ukraine in February. It was a sharp reversal from the first quarter when the economy grew 3.5 percent.

Western sanctions cut Russia off from about half of its $600 billion emergency stash of foreign currency and gold. They also made it hard for Russian banks to do business with Western banks and made it hard for Russian companies to use American technology. As a result, hundreds of big Western companies left the country.

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But even though imports to Russia stopped and financial transactions were blocked, forcing the country to stop paying its foreign debt, the Russian economy was stronger than some economists had thought. The fall in G.D.P. that was reported on Friday was not as bad as some had thought, in part because the country was getting more money from energy sales as prices around the world went up.

Analysts, though, say the economic toll will grow heavier as Western nations increasingly turn away from Russian oil and gas, critical sources of export revenue.

Russian Casualties in Crimea

Laura Solanko, a senior adviser at the Bank of Finland Institute for Economies in Transition, said about the Russian economy, “We thought it would take a big drop this year and then level off.” Instead, she said, the economy has been in a shallower recession for two years. This is because the decline in the economy has been less severe.

Before the war, Russia had a $1.5 trillion economy. In the days after the invasion, Russia moved quickly to lessen the effects of sanctions. The central bank more than doubled the interest rate to 20%, severely limited the flow of money out of the country, shut down stock trading on the Moscow Exchange, and eased rules on banks so that lending wouldn’t stop. The government also gave out more money for social programs and loans to businesses that were hurt by sanctions.

The measures blunted some of the impacts of the sanctions. And as the ruble rebounded, Russia’s finances benefited from high oil prices.

Dmitry Dolgin, the chief economist for Russia at the Dutch bank ING, said, “Russia withstood the initial shock of the sanctions” and “has been pretty strong so far.” But, he said, Russia’s economy will get worse in the long run if it doesn’t find ways to diversify its trade and finances.

Retail trade declined about 10 percent, the statistics agency said, while wholesale business activity fell 15 percent.

Michael S. Bernstam, a research fellow at Stanford University’s Hoover Institution, said that the data that came out on Friday matched other reports from Russia. He also thinks that the economy will get worse in the second half of this year and 2023.

Filling up in St. Petersburg. The outlook is not good for Russia’s energy industry, which is a big part of the economy. Credit… Anatoly Maltsev/EPA, via Shutterstock

As the war goes on, many countries and businesses will try to cut ties with Russia and its companies for good. Parts for machines made in the West will be hard for businesses to get, and software will need to be updated. As imports slow down, Russian companies will have to change how they get their goods to customers.

Russia’s energy industry, which is a key part of the country’s economy, is losing ground. The United States and Britain have already stopped buying oil from Russia, and the country’s oil production will drop even more when a ban on imports by the European Union takes full effect early next year. The International Energy Agency says that Russia would need to find buyers for about 2.3 million barrels of crude oil and oil products every day. This is about 20% of its average output in 2022.

So far, India, China, and Turkey have picked up some of the trade that Europe and the US have lost, but it’s not clear how many new buyers can be found.

Less natural gas from Russia is also being used. A report from the European Central Bank says that the amount of gas the European Union bought from Russia in the last week of June was 65 percent less than the same time last year. Europe has had to deal with some of these drops because Russia has cut back on the amount of gas it sends to Europe. But European countries are working harder than ever to find other sources. For example, they are building infrastructure quickly so they can bring in more liquefied natural gas.

Mr. Dolgin of ING wrote that the economy will suffer as a result of “the exhaustion of inventories of investment imports, the enforcement of the EU oil embargo, higher financial pressure on households, and their increased reliance on the state.” This is because the central bank and government can only do so much to help with money and spending.

Shortly after Russia invaded Ukraine, inflation shot up as people rushed to buy things they thought would be hard to get. The Russian central bank said that in July, inflation was running at more than 15%. But there are already signs that inflation is starting to slow down, so the central bank has cut interest rates to 8%, which is lower than they were before the war.

Last month, the bank said that business activity had not slowed as much as expected, but that the economic environment “remains challenging and continues to significantly limit economic activity.”

The bank thinks that the economy will shrink by 4% to 6% this year, which is much less than what it thought right after the war began. That 6 percent number is also the same as what the International Monetary Fund said in its most recent report.

The economy will shrink more next year, and growth won’t start again until 2025, the central bank said on Friday. The bank said that by the end of the year, inflation would be between 12% and 15%.

In the coming months, there will be problems with the supply chain as businesses that are limited by sanctions try to change their supply chains to get more finished and raw goods.

“I don’t think the Russian economy is doing well at the moment,” Ms. Solanko said. But the idea that sanctions and the departure of companies from Russia would cause the economy to rapidly collapse was never realistic. “Economies just don’t vanish,” she said.

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