The Bank of Russia called the conditions for the onset of the global financial crisis

The Bank of Russia included in the draft Monetary Policy Guidelines (MP) as an alternative scenario of a global financial and economic crisis, which, given a combination of factors, could begin as early as early next year. The document was published on the website of the Central Bank.

The “global crisis” scenario assumes increased fragmentation in the world economy, when international trade will be increasingly concentrated in regional blocs, the document says. In this case, countries will be more focused on increasing the localization of production. Against this background, the scenario assumes the realization of two risks at the beginning of 2023, the combination of which could exacerbate imbalances in the global economy and lead to a new global financial and economic crisis comparable in scale to the 2007–2008 crisis.

The first factor is persistently high inflation in the largest economies, which may require a sharper and more significant tightening of monetary policy in these countries. “The consequence of this will be a recession in the largest economies. In countries with emerging markets, especially those with a large amount of external debt, due to the growth of external rates, the stability of the financial situation may noticeably decrease,” the Central Bank notes.

The second condition for the implementation of the scenario is an increase in geopolitical tensions in the world, including the introduction of new sanctions against the Russian economy.

The global crisis will provoke a decrease in external demand, which means a drop in prices and volumes of Russian exports – this will significantly complicate the structural adjustment and adaptation of Russia to new conditions, the Central Bank believes. In this case, Russian GDP in 2023 will contract more strongly (a decline of 5.5-8.5%) than in 2022 (a decline of 4-6%). In 2024, the decline will continue (by 2-3%), and only in 2025 is a slight increase possible – from 0 to 1%, the Central Bank predicts.

Annual inflation in Russia in 2023 will rise to 13-16% against the background of the weakening of the ruble and tightening restrictions on the supply side, inflation expectations will also increase, the regulator believes. The Central Bank will significantly increase the key rate compared to the baseline scenario and will maintain it at an elevated level in order to ensure that inflation returns to the target in 2025, the document says. The key rate on average for the year will be at the level of 10.5-10.8% in 2022, 11.5-13.5% in 2023, 12-13% in 2024, 6-7% in 2025 G.

Exports and imports in this case will fall for three years in a row. Deliveries from Russia will decrease by 13-17%, 26-30%, 14.5-16.5% in 2022-2024, respectively. Imports will decrease by 27.5-31.5% in 2022, 22-26% in 2023, 14.5-16.5% in 2024. In 2025, the growth of indicators will be within 1%.

In the base case, the global economy continues to slow down as major central banks raise rates in response to rising inflation. “However, a prudent monetary policy will allow the largest economies to avoid a large-scale recession,” the Central Bank believes.

The sanctions imposed on the Russian economy will generally remain throughout the entire forecast horizon, the Bank of Russia predicts. According to this scenario, in 2022 Russia’s GDP will decrease by 4-6%, in 2023 – by 1-4%, in 2024 and 2025 – will grow by 1.5-2.5%.

Under the influence of monetary policy, annual inflation will be 12–15% in 2022, fall to 5–7% in 2023, return to 4% in 2024, and will be close to the target in the future. “The return of annual inflation to the target will be gradual, including due to the inevitable adjustment of relative prices for a wide range of goods and services in the process of structural adjustment of the Russian economy,” the Bank of Russia expects.

In the baseline scenario, the key rate will be in the range of 10.5–10.8% per annum in 2022, 6.5–8.5% per annum in 2023, and 6.0–7.0% per annum in 2024. 2025 The Bank of Russia will return the key rate to a long-term neutral range. However, during the period of economic restructuring, the uncertainty of its estimates is higher, so the Bank of Russia will assess the total impact of factors on it as data accumulate.

The “Accelerated Adaptation” alternative scenario assumes a faster adaptation of the Russian economy to new conditions compared to the baseline scenario, given a similar state of the global economy and geopolitical background. In this scenario, a large-scale recession in the global economy will be avoided, the regulator believes.

According to the Central Bank’s forecast, a faster restructuring of the economy will occur primarily due to better import dynamics than in the baseline scenario. The formation of new economic ties and the expansion of the mechanism of parallel imports will improve the dynamics of imports over the forecast horizon, the document says. The value of exports will also expand due to the growth in the physical volumes of deliveries, including oil and gas, which will be facilitated by the identification of new routes and methods for the delivery of energy resources, the reduction of transport, insurance and other logistics costs.

In this scenario, the growth of the Russian economy is possible as early as 2023 (forecast from -2% to +1%). In 2024, GDP growth is expected by 2.5-3.5%, in 2025 – by 2-3%. Annual inflation will return to a level close to the target by the end of 2023 with looser monetary policy compared to the baseline. In 2024–2025 annual inflation will remain close to 4% with the key rate being in the neutral range of 5.0-6.0% per annum.