Andrey Polbin, Head the International Macroeconomic Modeling Department at the Gaidar Institute, and Mikhail Andreev, Senior economist at the Bank of Russia, in a study published in the April issue of “Voprosy Ekonomiki” estimated the macroeconomic effects of the expected reduction in oil and gas revenues due to the imposed sanctions. The RBC published results of the research.

At the beginning of 2023, Russia's export revenues from the sale of energy resources remain high, however, on the horizon of several years there are great risks of their decline due to restrictions from unfriendly countries, the authors of the article warned. The authors proceeded from three scenarios of reduction of Russia's revenues from commodity exports on the horizon of the next years, by 40, 60 and 80%. They argue that such a reduction could have a "non-trivial" impact on the dynamics of the country's main macroeconomic indicators.

Over the past year, a number of countries have refused to buy energy resources from Russia and imposed a "ceiling" on prices of Russian oil and oil products, the authors of the study remind. Amid the introduction of restrictive measures, the trading discount for the Russian Urals oil mark increased against the Brent mark: its value in the spring of 2022 reached $40 per barrel, by the end of the summer declined to $20-25 per barrel and rose again by the start of 2023 to $30.

“There is a risk that Russia's revenues from energy exports will drop over the horizon of several years both due to a number of states refusing to consume specifically Russian energy carriers and due to a general reduction in demand due to the intentions of the global community to reduce their dependence under the aegis of the fight against global warming,” the article says.

To estimate the macroeconomic effect of such events, the authors built a model of Russia's economy, which is a "small open economy" heavily dependent on natural resource exports and with a closed financial account of the balance of payments. The latter means that economic agents have no capacity either to borrow funds from abroad or to invest abroad (in reality, Russia's financial account is not completely closed now, the authors stipulate). At the same time, all agents expect a permanent drop in the value of commodity exports in eight quarters from now by 40, 60 or 80%.

The impact of the expectation shock on the economy is concentrated around two time periods: when the news appears and when the event is realized (a drop in exports), economists point out. Their calculations showed that expectations of a future drop in commodity revenues do not result in the immediate decline in economic indicators. “A sharp decline in the GDP and consumption occurs closer to the actual onset of a decline in export revenues, while in the short term the dynamics of these indicators is smooth,” they state. Thus, when commodity revenues decline by 40, 60 and 80% in the long term, the GDP dropped by 7.1, 10.7 and 14.2%, respectively, and household consumption reduced by 9.3, 14 and 18.6%. However, eight quarters earlier the dynamics of the indicators was not expressively visible.

According to the model used by the authors, the drop in exports in the commodities sector is partially offset by growth in supplies in the non-sanctioned commodities sector. This is due to the expected weakening of the national currency, which benefits non-sanctioned exporters, as well as a decline in real wages. As a result, aggregate exports decline less significantly, losing 20 to about 50%, depending on the scenario. The authors describe the growth of non-energy exports in this model as an effect opposite to the "Dutch disease. The ruble weakening entails rising inflation, forcing the regulator to increase the key rate.

The authors specifically pointed out the differences in the effect of the expected shock of falling export earnings (after eight quarters) and the unexpected shock of falling incomes (in the current quarter). On the one hand, both shocks are marked by similar effects: falling consumption, output, imports, and depreciation of the national currency. However, on the other hand, significant difference is that during an expected shock a number of economic indicators, nominal and real exchange rate, prices, interest rate, fall, while during an unexpected shock, on the contrary, they grow. This means that monetary policy in the context of inflation targeting regime reacts alternatively: the rate drops during the expected shock, while it grows during the unexpected one.

Expectations of lower export earnings in the future “paradoxically have a stimulating effect on investment activity,” according to the study. This is due, in particular, to an increase in savings combined with restrictions on capital flows.

Cumulative investment in the economy increases by 4.5-9.0% in the short term relative to the base case of economic development, while the indicator grows by 15.8-31.6% at its peak after six quarters (depending on the scenario of a decline in energy exports). This suggests that theoretically, the "rainy day" savings motive under capital restrictions can stimulate investment activity within the economy, experts explain. Another factor of investment growth is the activity in the non-commodity exporting sector.

Experts Mikhail Andreev and Andrey Polbin concluded that investment growth (albeit in a smaller amount) is also observed when the financial account is open or the non-resource exporting sector is static even during sanctions shocks.