New sanctions are beginning to take maintain in Russia as Moscow admits the impression on the deficit

Russian President Vladimir Putin speaks during a news conference following a session of the State Council on youth policy in Moscow, Russia, December 22, 2022.

Sergei Guneyev | Sputnik | Reuters

The latest round of Western sanctions against Russia over its invasion of Ukraine is beginning to weigh on the country’s economy.

Russian Finance Minister Anton Siluanov reportedly told journalists on Tuesday that an oil price cap imposed by the major economies of the G-7 (Group of Seven), the European Union and Australia is depressing Russian export earnings and potentially pushing up Moscow’s budget deficit than the expected 2% next year.

Price caps on Russia’s crude and refinery exports could force the Kremlin to cut production by 5% to 7% next year, the RIA news agency quoted Deputy Prime Minister Alexander Novak as saying on Friday. However, Moscow should be able to fund the shortfall through domestic bond issuance and its Rainy Day Fund, officials have suggested.

The 27 countries of the EU also agreed in June to ban the purchase of Russian crude oil from December 5th.

“It is too early to fully assess the impact of the G7 oil price cap and the EU ban on Russian crude oil imports that came into effect on December 5, but early signs suggest that the Russian economy is beginning to feel the effects of the crisis,” said Nicholas Farr, Emerging Europe Economist at Capital Economics.

“High-frequency data shows that Russian oil exports have declined since sanctions were imposed and the spread between Brent crude prices versus Urals oil prices has widened to a six-month high [last] Week.”

Farr suggested that this will amplify the collapse in Russia’s energy revenues from the drop in 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, recovering to around $84.50/bbl by Tuesday morning in Europe.

Meanwhile, the Russian ruble fell nearly 10% against the dollar over the past week, making it by far the worst-performing EM currency after beating expectations for much of the year.

Farr suggested that a key consequence of a weakening ruble will be upward pressure on inflation from higher import costs. The Bank of Russia (CBR) ended its series of interest rate cuts in October and, after leaving monetary policy unchanged in December, warned that inflationary risks “outweigh” disinflationary ones.

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If the ruble falls further in 2023, Farr suggested the CBR might be forced to consider reintroducing rate hikes to keep inflation under control, and Capital Economics believes the erosion of Russia’s resilience to western ones Sanctions will become a key issue in 2023.

“Russia has benefited significantly from a boost in its trading conditions from high commodity prices in 2022, but … that support for the economy now appears to be waning,” Farr said in a note on Friday.

“We believe that Russia’s economy will suffer another contraction in 2023. Meanwhile, falling energy revenues mean Russia’s balance sheets will come under pressure.”

Capital Economics has been a key pillar of Russia’s economy strength this year and expects the current account surplus to “shrink rapidly in the coming months.”

“There is a high risk that a large external rebalancing will be required starting in 2024, which will keep growth extremely sluggish,” Farr added.

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