According to UC Berkeley economist Yuri Gorodnichenko, the country’s economy is in deep trouble and is set to enter a damaging recession within a year.
That’s because Russia is losing two things its economy desperately needs, he told Business Insider — strong energy trade and a steady flow of U.S. dollars.
Moscow’s economy is highly dependent on petrodollars, or dollars earned through oil and gas trade, Gorodnichenko said. Still, with Russia’s energy flows boosted by sanctions, it’s unclear whether sales to allies will be enough to prop up the Kremlin’s massive war budget — or whether Russia will have access to enough dollars to immediately import all the goods and resources its economy needs, he said.
This could put Russia’s economy on a fast track to recession in the next 12 months, Gorodnichenko predicted.
„If they have to finance the war and they don’t have this resource, it’s not clear where they will raise this money,” he added. „I predict they’re going to face a very severe recession.”
A fading energy empire
Energy trading is Russia’s biggest moneymaker. However – thanks, in part, to Western sanctions – Moscow’s oil and gas business has suffered in the past year. Sales fell 24% to a three-year low in 2023.
That decline is a major financial problem for the Kremlin. Its war against Ukraine is growing so expensive that the government has signed off on a military budget for 2024. At the current exchange rate, the country is set to run a deficit of 1.59 trillion rubles, or about $18 billion, this year.
„You do a back-of-the-envelope calculation and you realize very quickly that if Russia doesn’t have petrodollars, they’re going to have a very difficult problem,” Gorodnichenko said.
As crude transactions are conducted primarily in greenbacks, Russia is losing access to the US dollar as oil sales decline.
As the U.S. currency is the backbone of global trade, the small volume of dollars to transact could further isolate Russia from the global economy. Dollar per side account 88% of all foreign transactions As of April 2022, much more than any other currency, according to the latest data from the Bank for International Settlements.
Putin moved Russia’s independence and its currency away from America De-dollarize trade and develop alternative payment methods with its partners. But those measures push the nation closer to an economic crisis, Gorodnichenko said, especially considering that Russia still imports „everything” from cars to food, furniture and other consumer goods.
A historical look at Russia’s finances shows that GDP is highly correlated with how many petrodollars the economy has access to, Gorodnichenko said. Russia fell into recession during the global financial crisis and later in 2014, oil prices collapsed, reducing the amount of dollars it could bring in.
Gorodnichenko also noted that when the Soviet Union lost access to petrodollars, its economy collapsed within five years. He suggested that Russia’s economic collapse could occur even more quickly, as the Soviet Union was more self-sufficient in terms of resources than Russia is today.
„If they don’t have petrodollars to pay for all of their consumer investment products, they’re going to have some tough problems,” Gorodnychno said. „Maybe you can get it [resources] From China or somewhere else, but globally, it can’t really borrow. So when you have an adverse shock… the effect is amplified.”
Economists are warning of the risk of economic disaster for Russia from 2022, after its invasion of Ukraine triggered a barrage of sanctions that lifted trade and finance.
Russia’s economy is weakening more and more and the war will drag on, experts have said. Even Putin, who has presented a story of Russia’s resilient economy, has acknowledged major weaknesses in the country’s finances, with the country reeling from sky-high inflation, elevated borrowing costs and rising wages.