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Kremlin insiders have warned that Western sanctions could harm the Russian economy for the next decade

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Russia may face a longer and deeper recession as a result Sanctions of the USA and Europe spreads, hampering sectors the country has relied on for years to power its economy, an internal report prepared for the government said.

The document is the result of many months of work by officials and experts trying to assess the real impact Economic isolation of Russia over President Vladimir Putin’s invasion of Ukraine paints a far more dire picture than officials usually do in their upbeat public statements. Bloomberg has seen a copy of the report prepared for a closed-door meeting of top officials on August 30. People familiar with the discussions confirmed its authenticity.

Two of the three scenarios in the report show that the contraction will accelerate next year, with the economy not returning to pre-war levels until the end of the decade or later. The “inertial” scenario sees the economy bottoming out next year at 8.3% below 2021 levels, while the “stress” scenario sees a bottom in 2024 at 11.9% below last year’s level.

See all scenarios sanctions pressure is increasing, with more countries likely to join them. Europe’s sharp turn away from Russian oil and gas could also hit the Kremlin’s ability to supply its own market, the report said.

Beyond the restrictions themselves, which cover about a quarter of imports and exports, the report details how Russia now faces a “blockade” that “affects virtually all modes of transportation,” further cutting off the country’s economy. Technological and financial barriers add to the pressure. The report estimates that as many as 200,000 IT professionals could leave the country by 2025, the first official prediction of an expanding brain drain.

Officials have said publicly that the hit from the sanctions has been smaller than feared, with cuts of perhaps less than 3% this year and even less in 2023. Outside economists have also adjusted their forecasts for this year, abandoning initial forecasts of a deep recession and the economy holding up better than expected.

Export Drop

The document calls for a series of measures to support the economy and further ease the effects of restrictions, in order to restore the economy to pre-war levels in 2024 and grow steadily thereafter. But the moves include many of the same investment stimulus measures the government has touted over the past decade, when growth has largely stagnated even without sanctions.

Asked about the Bloomberg report Tuesday morning in Vladivostok, Economy Minister Maksim Rashetnikov called the forecasts “analytical estimates that we used to calculate what will happen if we don’t resist, do nothing,” TASS reported.

Over the next year or two, the report warns of “reductions in output in a number of export-oriented sectors”, from oil and gas to metals, chemicals and wood products. While some rebound is possible later, “these sectors will no longer be the engines of the economy.”

A complete shutdown of gas to Europe, Russia’s main export market, could cost up to 400 billion rubles ($6.6 billion) a year in lost tax revenue, according to the report. It will not be possible to completely compensate for the loss of sales with new export markets even in the medium term.

A blow to the oil sector

As a result, production will have to be cut, threatening the Kremlin’s goal of expanding domestic gas supplies, the report said. The lack of technology needed for LNG plants is “critical” and could hamper efforts to build new ones.

Europe’s plans to stop importing Russian oil products — about 55% of exports went there last year — could cause a sharp cut in production, leaving the domestic market also short of fuel.

Metals producers lose $5.7 billion annually from the restrictions, the report said.

If the global economy slips into recession, the report warns, Russia could face a further decline in exports as it becomes a “swing supplier” in global markets and demand for its products is the first to disappear. This can cause a fall in the ruble and a spike in inflation.

On the import side, “the main short-term risk is the suspension of production due to a lack of imported raw materials and components.” In the long run, the inability to repair imported equipment could limit growth forever, the report said.

“Critical Import”

“There are simply no alternative suppliers for some critical import goods,” it said.

Even in the agricultural sector, where the Kremlin has touted its efforts to replace foreign supplies, dependence on the main resource could force Russians to cut back on food consumption as supplies dwindle, according to the report.

Restrictions on access to Western technology could push Russia a generation or two behind today’s standards, as it is forced to rely on less advanced alternatives from China and Southeast Asia.

The report warned that the sanctions would also force the government to revise a number of development targets that Putin had set before the war, including increasing population growth and life expectancy.

On a sectoral basis, the report details the breadth of the sanctions’ impact:

  • Agriculture: Fully 99% of poultry production and 30% of Holstein dairy cattle are imported. Seeds for staples such as sugar beet and potatoes are also largely imported, as are fish feed and amino acids.
  • Aviation: 95% of passenger volume is carried by foreign-made aircraft, and lack of access to imported spare parts could lead to fleet reductions as they retire
  • Mechanical engineering: only 30% of machine tools are Russian-made, and the local industry is unable to meet the growing demand
  • Pharmaceuticals: About 80% of domestic production relies on imported raw materials
  • Transport: EU restrictions have tripled the cost of road transport
  • Communications and IT: Limits on SIM cards could force Russia to run out of SIM cards by 2025, and its telecoms sector could be five years behind world leaders in 2022.

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