21 Mar 2022 19:38

Fitch expects Russian economy to shrink 8%, consumer prices to soar 18% in 2022

LONDON. March 21 (Interfax) - Russia's GDP could shrink 8% this year amid coordinated international financial and economic sanctions which will cause major disruption to the banking sector and trade relationships, Fitch Ratings said.

But the extent of the GDP decline in 2022 is "highly uncertain" and will depend how long Russia's special operation in Ukraine lasts and how long the sanctions remain in place.

"This forecast drop in activity is comparable to that during the country's 1998 financial crisis, and then in the global financial crisis," Fitch said. The sanctions-related shock looks much larger in many respects - and will certainly last longer - but high oil prices, military spending and the current account surplus prior to the special operation could provide some cushion.

Russian GDP could fall just 0.2% in 2023.

The ruble has declined sharply against the US dollar since the start of the special operation in Ukraine, to around 105 rubles from 77 rubles, and has already triggered a sharp pick-up in inflation, Fitch said. Consumer price inflation might climb to 18% by the end of 2022 and could be 15% by the end of 2023.

Fitch expects an exchange rate of 135 rubles/$1 at end of 2022 and 130 rubles/$1 at end of 2023

The freezing of much of the Central Bank of Russia's $640 billion reserves "effectively hinders its ability to use these assets to stabilize the Russian ruble and meet its international payment obligations," Fitch said.

Household spending might fall 10.2% in 2022 and 2.6% in 2023.

The CBR has responded to the latest events with an almost doubling of policy rates, to 20%, with further increases likely, in Fitch's view, to 25% this year before easing to 18% by end-2023.

"We expect financial conditions to tighten sharply as banks struggle to cope with huge international sanctions pressure. As more multinational companies pare business activity in Russia, foreign investment will be reduced. Increased uncertainty is also expected to hit domestic investment hard. This will be compounded by measures adopted by the Russian authorities to ban the export of a number of products while Western economies have also imposed import bans on a number of goods - a combination that is likely to result in a drop in trade volumes," Fitch said.