J.P. Morgan Says Russian Economy Will Shrink 35% in Second Quarter

J.P. Morgan said on Thursday it expected Russia’s economy to experience a severe contraction thanks to sanctions and economic fallout from the attack on Ukraine.

The economy is likely to shrink at a 35 percent in the second quarter and contract seven percent in 2022.

“Sanctions and decisions of foreign businesses to pause or halt Russia operations have led to a stall in international trade, reduced output, and supply-chain disruptions,” JPMorgan strategist Anatoliy Shal wrote in a note to clients.

That would put the decline in output on par with the 1998 economic crisis that helped bring Putin to power and the 2008 global financial crisis.

“A peak-to trough decline in Russian GDP is now expected at around 12%, comparable to 1998 (~10%) and 2008 (~11%) crises and COVID-19 shock (~9%),” Shal wrote.

JPMorgan expects exports to decline around 13 percent this year, which may be overly optimistic due to the unofficial ‘self-sanctioning’ that has hit the market for Russian oil. The bank’s analyst expects domestic demand to fall by about 10 percent and imports to drop around 30 percent.

On a positive note for Russians, there are signs that the run on the banks is easing as Russian people realize that their banking system cannot run short of rubles no matter how harsh the sanctions from outside Russia might be.

“The shock implies a lower potential output, which will be accompanied with a spike in prices — A credit crunch will add to pain, although there are signs that the run on banks is easing,” Shal wrote.

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