JPMorgan warns Russia headed for 1998-like ‘collapse’ in economy

JPMorgan Chase & Co.’s analysts are starting to factor in the increasing disruptions to Russia’s exports, with the US bank’s latest tally of damage from sanctions showing the economy’s “collapse” might be comparable to the fallout from the country’s default in 1998.

A “peak-to trough” crash in Russian GDP is now expected at around 11%, “in line with the drop in the 1998 debt crisis,” JPMorgan economists said in a note to clients. Sanctions imposed on the central bank, alongside the cut-off from the SWIFT global messaging system, created obstacles for Russia’s ability to sell oil and gas, according to JPMorgan. 

“Russia’s export earnings will be disrupted, and capital outflows will likely be immediate despite its large current-account surplus,” they said. “Imports and GDP will collapse.”

President Vladimir Putin’s invasion of Ukraine has unleashed uncertainty in global oil markets, with buyers steering clear of doing business with Russia as the US and others seek to isolate it from financial markets. Traders are offering Russia’s flagship crude at a record discount in an attempt to attract buyers.

The unprecedented restrictions on the Bank of Russia have meanwhile handcuffed its ability to defend the ruble, which is already down more than 30% against the dollar this year. Instead, policymakers more than doubled the key interest rate to 20% and hardened capital controls.

“Downward pressure on the ruble and capital flight are pushing the Russian central bank to raise rates dramatically and impose capital controls,” JPMorgan’s analysts said. “Sanctions undermine the two pillars promoting stability — the ‘fortress’ foreign-currency reserves of the central bank and Russia’s current account surplus.”

Oil and gas revenue has been providing a hard-currency lifeline for Russia because the sale and transport of energy largely escaped direct disruptions. Russia was running a monthly current-account surplus of about $20 billion at the start of the year.

The Biden administration is still opposed to banning oil imports from Russia, though its objections are putting it at odds with a bipartisan clamour to punish Moscow for the invasion of Ukraine.

JPMorgan now expects Russia’s economy to shrink 7% this year, down from its previous forecast for a 3.5% decline. It sees a drop of 10% this quarter on a seasonally adjusted annual basis, followed by a plunge of 35% in the following three months. 

 “The sanctions will hit their mark on the Russian economy, which now looks headed for a deep recession,” the analysts said.

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