JPMorgan: Russia’s economy faces 1998-like collapse

on Mar 4, 2022
  • Russia's invasion of Ukraine led to a raft of tough sanctions from the US and Europe.
  • Analysts say economic repurcussions could see Russia's GDP contract by 7% or more in 2022.
  • This could eclipse the 1998 debt crisis that saw the economy shrink 5.3%

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JPMorgan said in a note Friday that Russia’s invasion of Ukraine is already having far-reaching repercussions to the country’s economy.

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Economists are forecasting a slowdown in the gross domestic product (GDP) above 7%, although sanctions on Moscow’s lifeline (oil and gas supplies) could send that into double digits.

Days after the invasion, the Russian stock market has remained closed for five straight sessions. Elsewhere, the national currency ruble is in dire need of a boost, but with sanctions biting hard this might not be coming any time soon. Major companies such as BP, Shell and TotalEnergies have either indicated they’ll exit the Russian market or are cutting on investment.

Germany’s Henkel is the latest to take this step.

Russia is headed for a deep depression

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While the markets might rebound in the short term, the possibility of further sanctions crippling the economy is more than likely. It is this that has JPMorgan saying the country could be headed for a massive economic collapse.

In their assessment, analysts at the financial services and investment giant says it’s likely the Ukraine war could result in a decline in what is currently the world’s 11th largest economy.

According to JPMorgan’s Bruce Kasman, the sanctions imposed on Russia by the US, European countries, and Canada have greatly impacted the country’s foreign-currency reserves and current account surplus. He said in the note to investors that the sanctions have a mark to “hit”- the economy, which he believes is now on course for a dive into a deep recession.

Further turmoil in the Russian market and inflationary weakness harbinger similarities to the 1998 crisis, the analysts added.

In 1998, Russia’s economy shrank 5.3% as a collapse precipitated by a debt default hit. This year, JPMorgan expects the country’s GDP to shrink by 7%.  If the pressure to block oil and gas exports sees the US and other countries take the route, expect the economy to shrink by up to 14%, according to Bloomberg Economics.

Russia has realised just how crippling the sanctions can be and has elected a range of measures targeted at remedying the situation. But according to analysts, instituting capital controls and hiking interest rates among other measures might only succeed in inhibiting economic growth.

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