Russia's energy trade slump, and less access to dollar point at severe recession

Acclaimed UC Berkeley economist Yuriy Gorodnichenko, the nation's economy is in deep trouble and is set to enter a damaging recession within a year.Russia's energy profits are tumbling, and the nation could face major financial trouble as it loses access to the US dollar.Vladimir Putin's claims that Russia's economy is doing just fine may soon be hard to back up. Its economy is mostly dependent on petrodollars or dollars obtained through the oil and gas trade, he has said. Yet, with Russia's energy flows upended by sanctions, it's unclear if sales to friendly nations will be enough to prop up the Kremlin's hefty war budget — or if Russia will have enough access to dollars to readily import all the goods and resources its economy needs to function, he said.

The fact is that energy trade is Russia's biggest money maker. However, thanks, in part, to western sanctions, Moscow's oil and gas business has suffered over the last year, with sales plunging 24 per cent to a three-year-low in 2023.That decline is a big financial problem for the Kremlin as its war against Ukraine is proving costlier with the government signing a record military budget for this year. The nation is set to rack up a deficit of around $18 billion this year, according to the current exchange rate.

Putin has played up Russia's independence from the US and its currency, moving to de-dollarize trade and create alternative payment systems with its allies. But those actions are only pushing the nation closer to economic hardship, Gorodnichenko said, especially considering the fact that Russia still imports ‘just about everything’ from cars to food to furniture and other consumer goods.Russia's economy is becoming increasingly fragile as the war is dragging on, experts have said.

Even Putin, who has pushed the narrative of the country’s resilient economy, has admitted to key weaknesses in its finances, with the country reeling from sky-high inflation, elevated borrowing costs, and soaring wages.Despite this perfect storm, Kremlin continues to play hardballand is due to double its import taxes on spirits, including Scotch whisky from the UK, as early as August. It is also considering slapping a 200% duty on wine imports from NATO states.

The drinks trade has largely rallied behind Ukraine, with many major companies ceasing to trade with Russia, including Pernod Ricard, Heineken, Carlsberg, and now Bacardi, although the journey to withdraw from Russia has been a twisted path for the latter). However, not all firms in the sector have been completely transparent about their exit from the Russia market. Some allegedly continue to trade with Russia using Latvia as a middle man in order to conceal their ties.“Currently the per capita sales of absolute alcohol are growing in Russia.

This clearly indicates an increase in consumption. This is how the population responds to difficulties,” said Evgeny Andreev, a leading researcher at the Centre for Demographic Research of the Russian Economic School (NES).Ukraine has also seen increased demand for spirits since the start of the war, especially gin, which has been seeing a notable growth.