Russia suffers brain drain, will have dilapidated air fleet and set back 15 years

The sanctions imposed by the United States, the European Union and other nations on Russia will lead to a drop of at least 15% in the country’s GDP (Gross Domestic Product) this year and another -3% in 2023.

The unprecedented downturn in the biennium will bring the size of the Russian economy back to the level of 15 years ago, according to the forecast by the International Institute of Finance (IIF), which brings together 450 banks and institutions around the world.

The deterioration of the economy and the discontent with the war among many Russians — in addition to the persecution against those who protest — should also accelerate emigration from the country, especially those with higher economic and educational level.

The movement will impact future productivity, which has fallen since the mid-2000s. Even in the oil and gas sector, the expectation is for a strong retraction in investments. In the air, the country may lose a large part of its aircraft fleet.

According to the IIF, the adhesion of around 400 private companies to the sanctions against Russia has reinforced the expectation of a contraction in GDP. Since the attacks on Ukraine began, iconic companies such as McDonalds, Coca-Cola, Pepsi Co. and Ikea announced the suspension or closure of activities.

The forecast points to a 24% drop in domestic consumption in the second quarter alone, mainly due to the depreciation of the ruble and the soaring inflation.

Investments in the productive sector are expected to fall 23%, with local companies lacking cash in dollars (and with the ruble devalued) for the purchase of machinery and equipment. In foreign trade, the drop in exports should reach 30%; of imports, 34%.

The forecast of a 15% decline in GDP this year, according to the IIF, can be considered optimistic. “We believe that the conflict is more likely to prolong and lead to new sanctions, potentially including major exports such as oil and natural gas,” it says.

In the medium and long term, an eventual recovery of the Russian economy will be in check with the increase of the so-called “brain drain”.

“Some observers estimate that around 200,000 to 300,000 people have left Russia in the last three and a half weeks. There are flights to Turkey being booked until 2023 and a third daily train from Saint Petersburg to Helsinki has been added to accommodate the high demand.” , says the IIF report.

The brain drain in Russia is not a new phenomenon. After a “golden period” of economic expansion and double-digit real income growth in the 2000s, emigration accelerated again after Vladimir Putin’s return to the presidency in 2012 and continued after Russian military action in Ukraine in 2014 — and the imposition international sanctions at the time.

According to official figures, nearly half a million people left Russia in 2020, nearly double the numbers during the economically troubled 1990s.

The brain drain — plus US and EU technology export controls that will impede technological development for years — is expected to lower productivity and GDP growth even further from today’s already low levels.

This Wednesday (23), Anatoli Chubais, an adviser to Vladimir Putin known as the architect of Russia’s privatizations in the 1990s and who acted as an envoy for the climate, left Russia.

In the vital oil and gas sector, since 2014 foreign companies had already been banned from investing in new projects. But multinationals have also abandoned joint ventures with Russian companies in recent weeks.

While this may not have an immediate impact on production and exports, the sector tends to run out of investments to maintain infrastructure and explore new reserves.

Another area to be heavily affected is aviation. Airbus and Boeing — which account for nearly 70% of the roughly 1,000 aircraft owned by Russian companies — have canceled maintenance contracts and are halting parts deliveries.

More than two-thirds of the planes used in the country are under “leasing” contracts, and sanctions dictate that they be terminated at the end of March.