Economic paradox: Western sanctions could save Russia from recession
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Is a new economic crisis possible? The heads of central banks around the world do not rule out such an option, and Europe is already at risk. Thus, the head of the Bank of Russia, Elvira Nabiullina, recently warned, speaking in the State Duma, that “the situation and the balance of risks for the global economy … have shifted somewhat, if not towards a full-scale global crisis, then at least a tougher option …” And the Bank of England warned back in the summer that, starting from the fourth quarter of this year, the UK economy will enter a recession, although by the end of 2022 GDP growth will be positive.
A similar view on the prospects for the economy of the eurozone and the entire continental Europe is shown by the ECB and the European Commission, having published a warning in early autumn that in the fourth quarter of 2022, an economic recession may begin in some countries of the eurozone and the EU.
There are already real prerequisites for a recession in Europe. First of all, these are the energy and food crises, as well as the double-digit consumer price inflation fueled by them, more precisely, by the sharp rise in energy and food prices, in many Western countries that used to worry only about chronic deflation. The prerequisites, in turn, for the energy and food crises were before. For example, the 2020-2021 pandemic caused disruptions in the supply of goods and raw materials around the world due to lockdowns and production shutdowns, and in addition to this led to the swelling of the money supply in Western countries. Thus, in the United States, Great Britain and a number of G7 countries, central banks printed money that was distributed to the population in order to maintain consumer demand (the so-called helicopter money). This led to a sharp increase in the money supply in circulation, which in itself is a very important factor in the growth of inflation. Inflation after such experiments with printing presses was not long in coming, jumping in Western countries in the first half of this year to the highs of 40-50 years ago.
At first, the central banks of Western countries took the sharp rise in inflation quite calmly. After all, they always had in stock an effective tool to combat excessive growth or, conversely, excessive fall in prices in the form of raising or lowering interest rates. So, in 2020, when the covid pandemic raged around the world, which threatened the West with a collapse in prices and a crisis in the consumer market, central banks almost competed among themselves who would lower interest rates the most. In the eurozone, the base rate was already zero at that time, and, for example, in Switzerland and Japan, central bank interest rates were generally negative. And this time-tested method worked: in 2021, the global economy, despite the fact that the coronavirus pandemic has not yet fully ended, quickly began to emerge from the crisis. But this year, when the Western countries faced the opposite phenomenon – the growth of inflation instead of falling, the central banks of Western countries quite logically rushed to raise rates. Although, for example, the European Central Bank simply did nothing in the expectation that inflation would go away on its own. But it did not pass: annual inflation in the eurozone in October exceeded 10%, being at a record high level in the entire history of the existence of this zone.
Why are the time-tested methods of fighting inflation in the US so far working slowly, while in continental Europe and the UK not working at all? The fact is that pro-inflationary factors in Western countries began to operate long before the pandemic. The US oil embargo against Venezuela and Iran, as well as sanctions against the Russian oil industry, which implied a ban on the supply of new technologies to Russian companies from Western countries, led to a lack of investment in the industry and this year became a factor in rising prices for oil and oil products. These phenomena were further exacerbated in 2022, when the US, UK and EU imposed new sanctions on Russian energy resources and began either abruptly, like the US and the UK, or gradually, like the EU, to abandon their consumption. Which only pushed the rise in prices for oil and gas, and the rapidly rising price of gas led to the same rapid rise in the price of electricity. Economists around the world remembered the energy crisis of the 1970s, when there was first serious talk in scientific circles about cost-push inflation and that price increases could be generated by more than just an increase in the amount of money in circulation. And it is very likely that the concept of inflation of costs is already working today, when inflation is going up from month to month, following high prices for energy resources, as well as for food and products of energy-intensive industries (chemistry, fertilizers, metals, etc.). Consequently, the fight against inflation solely by raising interest rates has so far yielded insufficient results. To this it must be added that the increase in interest rates in itself has a downside in the form of a slowdown in the growth of production and the real sector of the economy in general.
If we draw historical analogies, then the current energy crisis has more in common with the energy crisis of 1973-1974, and the difficult geopolitical situation (the Arab-Israeli military conflict) also added uncertainty to the markets and warmed up oil prices. But even that crisis, although it dealt a severe blow to the economies of the G7 countries and greatly increased the role of OPEC in the world, did not last long. Firstly, because at that time the West, much stronger economically and politically than today, for the first time thought about switching to energy-saving technologies (and in the United States, experimental work began on drilling shale rocks in order to increase oil production in the future). Secondly, the crisis was quickly resolved by political means through negotiations between the US and Saudi Arabia. Then Washington promised to supply weapons to Saudi Arabia and protect it from Israel if necessary, and Saudi Arabia in return promised to sell oil only for US dollars, and both sides fulfilled their promises.
The current recession is likely to be localized and affect the eurozone more than other countries. But it can turn out to be very long and large-scale, as it will be accompanied by truly tectonic changes in the political and economic architecture throughout the world. However, the US is more stable. The Fed has so far managed to keep the economy out of a very deep recession, as it started a sharp increase in interest rates before all the central banks of the Western countries. On the other hand, monetary policy is also supported by the sale of oil from the US strategic reserves in the domestic market, as well as an increase in the production of electricity from renewable sources there. But the recovery of growth in the US economy is already happening at the expense of the European economy, both in the EU and in non-EU countries, such as the UK. European capital is moving to the US as a safe haven – in America, electricity prices are now lower than in Europe, and the euro has weakened to parity with the dollar.
But what about Russia? Paradoxically, the refusal of Western countries from Russian energy resources, as well as the withdrawal of Western business from our country and restrictions on the export of goods to the Russian Federation, are saving the domestic economy from recession today, since it is now much less connected with the European Union. At the same time, high oil prices act as a support factor for the Russian economy. In addition, China and India are much more stable amid the crisis in the economies of the G7 countries. And the course of events leads to the fact that in a few years the main drivers of global economic growth will be China and India, while Europe may lose its economic and political influence. It cannot be said that this will pass completely without a trace for Russia, since in the next two years it will be necessary to completely reconfigure the infrastructure and supply chains to increase exports to Asian countries. We will have to forget about economic growth in 2022-2024. Consumer price inflation in Russia may turn out to be slightly higher than predicted next year, approximately in the range of 6-8%. But the ruble can bring pleasant surprises, since in a difficult geopolitical situation, as well as taking into account the postponement of the return to the “budget rule” and the reduction in imports, Russians will not see much demand for dollars and euros. It is very likely that 60–63 rubles per dollar and the same amount per euro (there is now parity between these currencies) may turn out to be a “fair” ruble exchange rate in 2022 and 2023.
Newspaper headline:
The world is waiting for a new economic crisis
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