Russia privately admits its economy facing biggest collapse in 30 years due to Western sanctions

Russia has privately admitted the country is facing the biggest economic collapse in three decades as a result of crippling Western sanctions, a leaked copy of the Kremlin’s forecast shows. 

The Russian Finance Ministry is predicting a 12 per cent collapse in gross domestic product (GDP) this year, the deepest economic contraction since 1994 when Russia was lurching towards capitalism under President Boris Yeltsin.

The leaked forecast will put pressure on Vladimir Putin, who is facing criticism from Kremlin officials who warn of the damaging political and economic cost of his war plan.

Russia’s export-dependent economy is now plunging into recession after the Russian strongman invaded Ukraine as the move triggered sweeping Western sanctions, including a partial freeze of its reserves.

According to leaked documents from the finance ministry, seen by Bloomberg, their figure of a 12 per cent contraction is more pessimistic than the Economy Ministry’s prediction of a 8 per cent decline this year.

The Kremlin has not released a public forecast since Russia invaded Ukraine and the Finance Ministry claimed the forecast was inaccurate. 

‘Preparation of official macroeconomic forecasts does not fall under the Finance Ministry’s authority,’ the ministry said in a statement, adding that it ‘expects that the measures taken by the government and the Bank of Russia will make it possible to ease to a large extent the negative consequences of sanctions and ensure stable economic development’.

At the weekend, the G7, including the US and UK, released a set of sweeping new sanctions that target Russian media and bank executives. 

During that meeting, G7 leaders agreed to follow the U.S. example and commit to phasing out or banning the import of Russian oil. The move will massively damage Putin’s ability to fund his war as energy is a main source of state revenue for Russia.

‘The main negatives are the oil embargo, the EU is giving up Russian gas, along with more departures from foreign companies,’ Natalie Lavrova, chief economist at BCS Financial Group in Moscow, told Bloomberg.

‘All that will probably expand gradually, with a lot of negative carrying over in on 2023.’ 

Lavrova predicts that Russia’s economy will face a contraction of 10.8 per cent this year and about 5 per cent in 2023 based on current sanctions. 

The Bank of Russia said on April 29 that it expects a contraction between 8 per cent and 10 per cent this year.

Last week, European Commission President Ursula von der Leyen called on the EU to ban oil imports from Russia.

Von der Leyen proposed having EU member nations phase out imports of crude oil within six months and refined products by the end of the year.

‘We will make sure that we phase out Russian oil in an orderly fashion, in a way that allows us and our partners to secure alternative supply routes and minimizes the impact on global markets,’ von der Leyen said.

The proposals must be unanimously approved to take effect and are likely to be the subject of fierce debate. Von der Leyen conceded that getting all 27 member countries — some of them landlocked and highly dependent on Russia for energy supplies — to agree on oil sanctions ‘will not be easy.’

The UK and Britain have already vowed to stop using Russian oil in response to the invasion of Ukraine.

The EU gets about 25 per cent of its oil from Russia, most of which goes toward gasoline and diesel for vehicles. Russia supplies about 14 per cent of diesel, S&P Global analysts said, and a cutoff could send already high prices for truck and tractor fuel soaring.

If approved, the ban on oil imports would be the second package of EU sanctions targeting Russia’s lucrative energy industry since the country invaded Ukraine.