His brutal war Vladimir Putin against Ukraine could change Europe more than any other event since the fall of communism and since. Nearly six months after the outbreak of the second war against Ukraine on February 24, 2022, the extent of the damage done to the Russian economy is almost impossible to assess. It is officially reported that GDP fell by 4% compared to the previous quarter. Russia after its 3.5 percent growth in the first quarter looks suspiciously small. On the other hand, the widely publicized claim by Yale University researchers that “the withdrawal of Western firms from the country and sanctions are hurting the Russian economy” seems exaggerated at the moment. Many of the monthly economic data for April and May of this year, referenced by the Yale University study, show large fluctuations. For example, the researchers cite the sharp drop in the PMI in Russia, the large drop in Chinese exports to Russia after the invasion began, and the huge drop in oil and gas revenues between March and May. However, PMIs have rebounded since May (to 54.7 for services and 50.3 for manufacturing in July), while Chinese exports to Russia have risen sharply again in recent months from $3.8bn (-26% yoy) in April to USD 6.8 billion (+22% yoy) in July. High oil and gas prices seem to continue to generate revenue for the state treasury, despite the decline in exports and production.

Under our assumptions, Russia is in a deep but not catastrophic recession. Official figures of a 9.4% decline in corporate loans between February and June may indicate a sharp decline in business activity. We expect the Russian economy to weaken further in the coming years for four main reasons. First, there will be loss of income. Russia receives significant income from exports. But if oil prices continue to normalize, the discount that has been in effect so far will hurt revenues. In physical terms, natural gas exports from Russia to the EU fell below a third of the pre-war level. With high spot gas prices, revenue cuts may not matter (yet). But the EU is likely to buy less and less gas from Russia, which cannot easily divert flows to Asia due to lack of pipelines.

Secondly, it is the loss of access to Western technologies and capital. Thirdly, there is an outflow of intellectual capital. And fourthly, the cost of repression is growing. To quell dissent against war or even falling living standards, Russia will have to devote more and more resources to its internal security services, which other countries will lack.

* Mr. Holger Schmieding is an economist at Berenberg Bank.