The Central Bank of Russia published its strategy and outlook for the near term on August 12 entitled, "The main directions of monetary policy until 2025". In none of the CBR’s three strategies does the regulator see the economy recovering from the cost of the war in Ukraine or the sanctions imposed by the West.

The three scenarios are the baseline, accelerated adaptation and, most ominously, a global crisis. 

Base case

The CBR’s preferred scenario takes into account the impact of all of the West’s sanctions, including the EU oil embargo which is due to start on December 5, when all Russian crude oil imports will be banned, followed by refined products on February 5.

Under this scenario the economy will contract by 4-6% this year and another 1-4% but return to growth in the fourth quarter of 2024 with a 1-2% expansion. Thereafter the economy will grow again, but will be limited to the range of 1.5-2.5% from 2025 onwards, according to Central Bank Deputy Chairman Alexei Zabotkin, as reported by The Bell.

During this period oil prices are expected to hold up at $80 per barrel in 2023 before falling to $70 and then $60 in the following two years respectively. 

The CBR also expects the cost of the Urals blend of oil to return to the long-term equilibrium level of $55 per barrel in 2025, and indeed the discount between the Russian blend and the benchmark Brent blend has already narrowed from a peak of $35 to around $15-$20 now as Russia finds alternative clients to buy the oil that Europe is now shunning.

The main impact of sanctions has been to radically alter Russia’s trade dynamics and that will persist, the CBR said. Exports and imports will be reduced both in physical and value terms under the base case.

In terms of money, thanks to the extraordinary high energy prices, exports will grow to $593bn and support the federal budget, but then exports are expected to decline to $417bn in 2025 as the market cools. This is almost a quarter less than last year and only 9.4% more than in the pre-pandemic results in 2020. Nevertheless, export revenues remain healthy even in the slowdown mode.

The CBR predicts that the physical volume of exports in 2022 will decrease by 13-17% in 2023 and another 8.5-12.5% in 2024 before stabilising thereafter with a long-term growth rate of 2%, possible from 2025.

The accelerated adjustment scenario differs little from the baseline and is possible in the event of a modest increase in export revenues due to a “small” improvement in the situation with transportation and logistics, faster formation of new partnerships and economic ties, the CBR says. In this scenario, a slight economic growth is possible by the end of 2023, the Central Bank believes.

Global crisis

The CBR also sketched out a scenario where the current shocks and imbalances cause a global crisis on the scale of the Great Financial Crisis of 2008.

CBR Governor Elvia Nabiullina should not be taken lightly in these predictions, as she very early on and correctly called the global inflation wave everyone has been suffering from in the last year and started tightening very early in May 2021. As a result, Russia has come to an end of its tightening cycle and Russia is the only country in Europe where inflation is now falling. (chart)

However, the global economy has been battered by multiple crises in the recent years. The global pandemic has seriously disrupted supply chains and to an extent caused a reversal of globalisation. That has had a knock-on effect of ending a decade of unusually low inflation rates. Rising prices have only been exacerbated by the war in Ukraine, which has poured petrol on the first of inflation and destabilised commodity markets that are bound to remain volatile as the economic war between the West and Russia looks like it could last years.

Russian President Vladimir Putin’s decision to invade Ukraine has unleashed very large tectonic forces that will, among other things, lead to the extensive restructuring of the global energy markets. In this uncertainty the CBR speculates conditions are ripe for a “Global Crisis” scenario.

The fragmentation of the global economy will continue and trade between countries will increasingly be concentrated in regional blocs, the Central Bank writes. Indeed, these trends were well underway before the war started and are bound to accelerate now as the West seeks ways to tighten the sanctions noose around Russia’s economic neck.

The CBR identifies two elements driving these trends. The first is persistently high inflation in major economies, which will require central banks to aggressively tighten monetary policy, resulting in a global recession. The second factor is the growing geopolitical tensions in the world, including the introduction of new sanctions against Russia, especially those targeting energy.

“The combination of these events could exacerbate imbalances in the global economy and lead to a new global financial and economic crisis, comparable in scale to the crisis of 2007-2008,” the regulator said.

With its economy already under pressure, a global crisis will significantly complicate its attempt at restructuring and adaptation to new conditions, as the budget will be stripped of a major source of revenue once commodity prices fall.

In the global crisis scenario the CBR has forecast Russia’s GDP will contract in 2023 more than in 2022. In 2024, the decline will continue, and only return to growth in 2025 – a year later than in the base case scenario – but even then growth will only be at a low rate of about 1%.

Inflation in the event of a global crisis in 2023 will rise to 13-16%, forcing the CBR to hike rates aggressively compared to the baseline scenario of 4%, and it will maintain rates at an elevated level.