THE WASHINGTON FOREIGN PRESS CENTER, WASHINGTON, D.C.
MODERATOR: Good morning – or good afternoon – and welcome to the Washington Foreign Press Center’s briefing by the State Department’s chief economist. My name is Jake Goshert. I’m the moderator for this briefing. As a reminder, this briefing is on the record. We will post a transcript of the briefing on our website, fpc.state.gov. For all the journalists joining us on Zoom, please take a moment now to rename yourself in the chat window with your name, your outlet, and your country so that when we do Q&A, we will know who we are calling on.
Our distinguished briefer today is Dr. Emily Blanchard, the chief economist for the U.S. State Department. Following her opening remarks, I will open the floor for questions. And with that housekeeping over, I’m going to turn it over to Dr. Blanchard.
MS BLANCHARD: Thank you so much. Good afternoon and thank you for this privilege of being here with you today. I’d like to take a few minutes at the top of our time together to bring attention to an issue that often gets lost amid the day-to-day scramble and focus on the Russian economy, looking at near-term changes in economic forecasts and economic conditions on the ground. And the key message that I want to deliver is that Russia’s long-run growth forecasts and forecasts for what will unfold over the future remain unbelievably consistent, stable, and grim.
Official and private sector forecasts have cut model-based estimates of Russia’s long-run growth potential by roughly two thirds since Putin’s brutal invasion of Ukraine on February 24th. Even the most optimistic economic forecasts will predict that the Russian economy will be at least 20 percent smaller by 2030 than it otherwise would have been if Russia and Putin had not invaded Ukraine this past February.
While the near-term growth prospects for Russia’s economy depend fundamentally on things like changes in global demand – and especially, of course, the price of oil – and Moscow’s fiscal and monetary policy gymnastics to mitigate the consequences of recent events, the long-run economic growth depends on a fundamental mathematics of four key factors: labor, or in other words, people; capital; the efficient allocation of resources across different uses in the economy; and innovation. And Putin’s war has fundamentally undermined and permanently changed the prospects for all four of those factors. So if I can, all just work through those four one by one, starting with labor.
So first, what we have seen is that those Russians with means – and remarkably, many Russians with very limited means – have voted with their feet and left Russian national soil by the hundreds of thousands. This exodus depletes the skills, the knowledge, the innovative capacity that Russia needs to thrive and grow into the future. And this exodus also compounds underlying pre-existing demographic challenges that already meant that Russia would face a depleted workforce in the future – due to aging, due to deteriorating health and economic and educational conditions, and of course, now made much more severe and much more acute by the war and the exodus of people fleeing Putin’s Russia.
This brain drain, which is disproportionately by high-skilled workers, will lead to enormous consequences for key sectors of the economy, like IT, communications, engineering, scientific research, finance. These are the sectors of the economy that Russia most needs to thrive and grow in the future and now has the greatest loss of workers to provide that growth. The upshot? By any estimate, Russia will end the decade with smaller, less skilled, less healthy, and therefore less productive workforce than it had even in January of this past year.
Second point, second factor: capital. Public and private capital have fled Putin’s Russia and cratered. Fixed capital investment has declined dramatically this year and is expected to decline again in coming years and isn’t expected to even begin to start to recover until at least 2028. This is enormously consequential. At the same time, Russia’s banking sector has been effectively severed from Western capital markets and firms have fled by the thousands, taking with them, of course, the financing and capital that they would need to grow, but also innovative and managerial capacity. This too has enormous consequences for fundamental drivers of long-run economic growth in the Russian economy.
Making this even worse is the third factor: the efficient allocation of resources across the economy. Putin’s mobilization draws away workers and capital, machinery, and know-how, away from efficient and profitable sectors of the economy towards military uses or import substitution. We know following 2014 that attempts to substitute for imports were already unsuccessful in the Russian economy. There’s no reason to think they would be more successful today where they’ve already failed in the past. And of course, the diversion of resources is more acute today than it was in the past. So over time, as people and resources shift out of profitable uses in the economy, we expect economic growth to continue to stagnate or decline.
This gets us to the final factor, that magic secret sauce to long-run economic growth, which is innovation, the ability of an economy to do more with less, and here Russia faces perhaps the most acute challenges of all. Russia’s remaining firms and managers and investors simply will not be a match for the 21st century economy, where you need lean, agile, and innovative companies. As the Russian state continues to centralize and have a heavier and tighter grip on the economy and the private sector, capital allocation will become less and less efficient; allocation of workers to firms and activities will become less and less efficient; corruption will have the perfect conditions to grow. All of this will stymie innovation and cripple Russia’s long-run economic growth.
So over time, there’s every reason to believe that economic stagnation will take hold. And indeed, private sector forecasts lay this out for us. Many private sector forecasts today predict that it will not be until 2030 that the Russian economy reaches the same level of real GDP outlet that it had in January 2022 before Putin launched his full-scale invasion of the Ukraine. Over time, this will get worse and worse.
And yet at the same time, I don’t want to focus entirely on Russia. Let me say a few more things, if I may, briefly, about the broader global economic impacts, because these too are absolutely critical. Russia’s policy choices have gravely impacted the global commodity market and thus the global economy. Russia has, simply put, become a risk we’re all looking to avoid and we’re all trying very hard to mitigate.
Food and energy prices have soared due to Russia’s aggression against Ukraine and due to retaliation against Europe by reducing natural gas shipments. These compromise – these reduced shipments compromise not only energy security and well-being in Europe itself, but they also reduce fertilizer production, which compromises productivity of agricultural sectors around the world. This compounds the reduction of grain shipments – because of the invasion of Ukraine – that are contribute to a global food security crisis. This is enormously consequential and costly. Putin’s supply shock reminds us that it is absolutely critical to maintain free and open shipping lanes and markets; the value of diversification of suppliers and not becoming overly reliant on any one regime, particularly an authoritarian one; and the importance of durable economic partnerships with reliable parties.
This ongoing global commodity market fallout from Putin’s war against Ukraine compounds other challenges in the world like the disruptions from natural disasters stemming from the climate crisis. And lest we should not forget it, we’re still recovering from the horrific global COVID-19 pandemic. There will be more disruptions to global supply chains. It is almost certain there will be more supposed black swan events.
These will be fueled again by natural disasters, the climate crisis, mitigation, conflict – heaven forbid, another pandemic. It’s hard to predict the exact time in nature of these kinds of disruptions, these kinds of shocks to the global economy. But we know that there will be more shocks to come. And so it’s absolutely imperative that countries work together to create a shared, sustainable, secure, diverse, and resilient global economy based on secure supply chains.
And so with that, I’d like to thank you for your time so far and I’m happy to answer questions.
MODERATOR: Thank you for those remarks, Dr. Blanchard. Before we open it up to questions, I remind the journalists joining us on Zoom to change your name to your name, your outlet, and your country. And for asking questions, you’ll be using your hand icon. We’ll start here in the room first if anyone has any questions. We’ll go to Ukraine first. And please state your name, outlet, and country.
QUESTION: I’m Dmitry Anopchenko, Ukrainian television D.C. correspondent. I would like to thank Foreign Press Center for organizing this.
Ma’am, I actually got two questions, if I may. Firstly, setting the Russian oil price cap at $68 per barrel, could you tell about your vision about the consequences? Because when this step was just discussed, it was not only for stabilizing the market – the aim was to take away the super-profits from Russia, to take away this chance to use those money for financing the war, for buying like Iranian drones and so on. So could you tell about possible consequences onto war and onto Russia?
And second, if I may, it’s a strong discussion about the plan to fund rebuilding Ukraine using frozen Russian funds seized as a part of the sanctions. There is no clear decision. But could you just share your own understanding how it might be and how it might work? Thank you.
MS BLANCHARD: Absolutely. Thank you very much for these two questions. I’ll take them in order, if that makes sense. So first, on the oil price gap, you’re absolutely right, the goal of the price gap is twofold, and both of these goals are of utmost importance. One, reduce the revenues that are funding Putin’s war against Ukraine – this is absolutely fundamental – and two, avoid a global energy shock. This is a challenge and this is part of why we are working together with coalition partners to get it right.
The $60 level is the best guess of coalition partners for how to achieve these two twin goals in the near term, but it’s worth noting that the oil price cap mechanism is deliberately flexible, so that if the goals are not achieved, then the level of the cap can be adjusted over time to make sure that we achieve these. So I am optimistic that this will work together, and I look forward to seeing the implementation of the price cap go ahead apace.
Second question? Okay. The second question is more challenging. As you have noted, this is a policy question not only for the United States but for our coalition partners abroad. I don’t care to speculate on what the outcome will be. I will take a step back and say whatever the source of funding, it is clear that Ukraine will need significant investments from the world to rebuild.
MODERATOR: Okay. I’ll go to Russia next. Again, state your name, outlet, and country.
QUESTION: Igor Naimushin, RIA Novosti. So the question is also about limit on the Russian oil price cap. So as we all know, so EU has finally agreed to establish the price at the limit of $60 per barrel, but yesterday, as we have just also discussed, Deputy Secretary of Treasury Wally Adeyemo said it could be a raised from time to time. So is there any range – like a minimum or maximum level – of the oil price cap that could be established? And by what factors shall it be revised? And don’t you think that such a flexibility without having one single limit of Russian oil price will undermine the very idea of such a mechanism? Thank you.
MS BLANCHARD: That’s a fair question. And let me reiterate, this is new. We have not seen a price cap like this work before. The flexibility in the mechanism is by design, and it’s because precisely we care about not the tool itself of the price cap; we care about the objectives, the goals that the price cap is designed to achieve. And so the agility and flexibility of the price itself is what is absolutely necessary to make sure we are meeting our twin goals of maintaining global energy security and denying Putin the revenues that are being used to fund the war.
MODERATOR: Okay. Any other questions in the room before we turn to Zoom? Yes, we’ll go to Germany.
QUESTION: Thank you for taking my question. Winan von Petersdorff from German newspaper Frankfurter Allgemeine Zeitung. A very basic question: Where did you get your numbers from, your data? Because – so it’s a hostile country, right? So there is no real data sharing going on, right?
And the second question is how is – so is it not the case that Russia was keeping up way better than everybody – Russia’s economy was keeping up way better than everybody expected? And how came that into being?
MS BLANCHARD: Yeah, great question. And again, really two questions so let me take those in part. So it is absolutely true that shortly after the invasion, the Russian finance ministries and other ministries began very quickly pulling down data and reporting less data, and so tracking the health and status of the Russian economy is more difficult today than it has been in the past.
You asked specifically about what numbers we use, and we have focused on a number looking at both private sector forecasts, but principally – and the solid numbers that I gave you – are from the International Monetary Fund. And so specifically when we cite our back of the envelope calculation, it says even under optimistic forecasts we would expect the Russian economy – or I should say forecasts would projected forward suggest the Russian economy would be about 20 percent – at least 20 percent smaller in 2030 than it otherwise would have been.
What we’re doing there is comparing the January 2022 IMF forecast for future long-run real economic growth for the Russian economy, comparing that with the most recent October 2022 IMF forecasts for that same time path for Russian GDP growth.
QUESTION: (Inaudible) challenging to start collecting, gathering data, right?
MS BLANCHARD: Absolutely.
QUESTION: They have some workaround methods to look at it, right?
MS BLANCHARD: Absolutely they do. And there are other forecasts – again, another set of forecasts that we’ve looked at very carefully recently and that I would cite as well is the economics intelligence unit, using somewhat different methodologies but projecting forward GDP. And they project that by 2030, even by 2030, Russian real GDP will not reach and recover back to its January 2022 levels. Again, a private sector forecast will use yet different algorithms, and it depends who you ask exactly how you do this math.
And this maybe brings us to the second part of your question, which is what about near-term economic growth forecasts? And here I will say there has always been a diversity of forecasts depending on which private sector analysts we look at or which methodologies are used by – whether it’s the IMF or other forecasters, government forecasts. There’s more near-term variation in those forecasts because it’s trickier to figure out and to anticipate the timing by which Russia’s economic challenges will unfold.
In the near term, fiscal and monetary policy choices, and as I mentioned at the top, global economic factors like the price of oil first and foremost for Russia and the price of natural gas, will be enormously consequential drivers of what happens in the near term. But again, in the long run, the inescapable forces of economics tell us that what will matter are people, and so labor, capital, allocation of resources, and innovation, and it is those fundamental drivers of real long-run economic growth where there – there is much more consistency and much grimmer forecasts for Russia’s future.
MODERATOR: Okay, let’s move to Zoom real quick for a few questions. And again, Zoom – if you can turn your camera on when asking your question. We’ll go first to Oskar Gorzynski from the Polish Press Agency.
QUESTION: Hi, can you hear me?
QUESTION: Thank you. So I have a similar question to the one previously asked, but I want to drill down on it. I’m talking about the short-term prospects for Russia. Well, just I think yesterday or today there was – it was announced that Russia’s PMI index increased to I think its highest level since like 2017. So I wonder how do you explain that, and it’s hard to argue against the – based on the numbers that we see that sanctions are not – are not affecting Russia as much as it was expected, right? I think you have to agree with that, hmm? So what is – what do you think is the reason for that?
MS BLANCHARD: Yeah, good question. Again, we come into some – as an economist, I will say there are methodological challenges when you try to focus on very near-term forecasts for the consequences especially of limits on exports from the Western coalition into Russia of critical technologies. These will take time to play out, so the effect of limits on technology exports to Russia will slowly but surely degrade Russia’s industrial base. How quickly that plays out is not known. What we do know is it will get worse over time.
To the extent that Russia had stockpiles of lots of critical inputs, it’s drawing down those stockpiles. It’s going to take more time to move forward. One thing that we can say is there are certainly sectors of the Russian economy where we’ve already seen industrial output crater. The most notable example – often reported in the press; thank you very much for the clarity on this – is looking at Russia’s auto sector. And this makes all the sense in the world because the modern economy – in the modern economy, particularly in the automotive sector, just-in-time production has been the dominant global model for output for how firms do business for decades. Justintime production means that those stockpiles of necessary inputs are not all there.
And so where we’ve seen the inputs, the necessary inputs to industrial production drawn down most quickly, we’ve seen industrial output crater. Over time, other stockpiles will be drawn down, and we expect industrial output in those sectors similarly to fall.
And again, I’ll add to this let’s not forget we also have the fact that Western firms have pulled out of Russia by the thousands, which will degrade managerial capacity and access to financing, and we have the diversion of Russian workers, many of whom have been called up to service – to serve and been drafted into the Russian military. Those are workers who are no longer on the factory floor.
So exactly when this is going to bite the hardest is very difficult to predict. But the fact that it will is all but certain.
MODERATOR: Okay, let’s stay in Zoom. Let’s go to Michaela Kuefner from Deutsche Welle. Michaela.
QUESTION: Yes, hello. Thank you for taking these questions. I would just like to follow on from that and just check that all your predictions are actually going on the assumption that the conflict will continue. When you say by 2030 the economy will be 20 percent smaller, why only 20 percent if these are long-term processes and long-term effects that we’re talking about? So where does the resilience come from? That essentially is the question.
And then I would be interested in finding out where you are potentially thinking of new pressure points, new sanctions that could still come into play and where you believe there are certain turning points that you are looking out for to assess from the outside where the Russian economy stands right now. Are there certain events, certain – I’m just looking for what markers you yourself have set where you will assess the situation or you can take a look from the outside in.
MS BLANCHARD: Yeah, these are excellent questions. So first, you say – you ask a quite reasonable and helpful question: Why only 20 percent? To be clear, at least 20 percent using the most optimistic forecasts from the IMF, right? So that’s a lot of qualifiers right there.
As this war continues, and perhaps as the contours of the war unfold, forecasts will continue to be updated as they already have been. And I would expect that those numbers would change over time. So we’re trying to provide a conservative, best-case scenario for the Russian economy is still very, very grim. That’s the first key message.
The second: identification of key pressure points. As our President has said, as Secretary of State Blinken has said, the United States will continue to work with coalition partners to identify new sanctions as opportunities allow and as needs demand.
And then the third question: canaries in the coalmine. Boy, this can get to be an awful lot of fun for an economist like me. There are many things that we watch. Certainly, again, I’ll go back to Econ 101, or I guess Econ 102 basics, and focus on those fundamental drivers of growth: changes in observable labor migration or labor patterns; labor outflows, particularly from China; continued divestment by Western firms. Many of them have been stymied in their – the speed by which they can pull out of the Russian market by capital controls that have been imposed by the Kremlin. But over time many of those capital flows will continue to proceed apace, and so those will be critical determinants.
And then in the nearer term, we can look at, of course, industrial output, we can look at things like inflation, but we need to be very careful – particularly when using numbers which are very limited coming from the Russian Federation itself. We can focus on – and I think we should pay close attention – to the fiscal balance sheet of the Russian economy. We should not get distracted by the current account or the trade deficit or, in Russia’s case today, the trade surplus. Of course, if the United States and coalition partners have deliberately decided to stop exporting goods, particularly critical goods to Russia, Russia can’t import the goods that it wants. So of course its current account, its national balance sheet, is going to go into surplus. And though it may be tempting to view that as a sign of a healthy economy, it’s not. Right? Russia can export but it’s having a very hard time using those export revenues to buy the goods and inputs that it wants and needs. So that’s point number one.
The fiscal budget situation is an incredibly important signal because this determines the Kremlin’s ability to finance its war. And here what we’ve seen is despite significantly elevated global prices for both oil and natural gas, the Russian economy, the Russian budget, is still expected to go into deficit this year – even within this new fiscal rule. That’s an incredibly important statistic that we continue to monitor very closely.
MODERATOR: Do we have any other questions in the room from anyone who hasn’t asked a question yet? No? Okay. I’m going to go back to Zoom real quick, to Alex.
QUESTION: Yes, Jake, thank you so much. And Dr. Blanchard, thank you for your time. May I get your sense of the U.S. Government’s position on a potential Turkish hub to hide gas made in Moscow? Two parts to this question, of course. Yeah. One is if Putin’s plan to make Turkey a hub – goes through by, like, Moscow to mask its exports with fuel from other sources – what kind of reaction would that invite from the U.S.? That’s number one. And number two, why do you think Russia turns to Turkey among all of the countries to be a gas hub for Europe?
And secondly, if I may, let’s also turn to some of the countries that are still reluctant to impose sanctions, including the ones in Central Asia and South Caucasus. I represent Azerbaijan’s independent news agency Turan. It seems that there’s a delicate balance for them as they feel like they might risk their relationship with Moscow in the process. But also they feel that they are not obligated to do so. Is that the case? Thank you so much.
MS BLANCHARD: Can I ask you – and thank you very much, and I got your first question around the Turkish gas hub. And here I want to be very careful not to get out over my skis. I’m an economist; I’m not making the economic policies around how we should deal, for example, with entrepôt trade through the Turkish economy. So I will sidestep that question, though it is a fair one, but not for me. I’m happy to ask State Department colleagues to get back to you with an answer that is more satisfying. I apologize that I can’t give it to you.
And on your second question, could you repeat that, the last piece of the question, so that I answer effectively, please?
QUESTION: Absolutely. Yeah, those countries – like ones in Central Asia and in the South Caucasus – they don’t feel that they are obligated to follow through your sanctions. I was just wondering if that is more or less right.
MS BLANCHARD: That’s a great question. I can’t speak for the motivations of the Central Asian governments and countries that are taking part there. We can observe the way in which trade patterns – imports and exports – have changed over time. And there is clearly some diversion where trade that used to happen with coalition countries is now proceeding with non-coalition countries. And so based on the data, there’s clearly a bit of a shift underway. But the motivations? Those aren’t for me to speak to.
MODERATOR: Okay. And we’ll take our last question. We’ll circle back where we started with Dmitry from Ukraine.
QUESTION: Oh, thank you. A very short question. Could you share your estimate: what is the price Russia is paying for this war? So what is the cost? Two days ago The Hill published their article and they told that Russia already spent $82 billion in nine months since the start of the war against Ukraine, but it’s direct spending; it should be the hidden cost.
MS BLANCHARD: Yeah, that’s great. And I think you’ve asked one of the most important questions for all of us, which is: what is the cost to the Russian economy, to the Russian people, of Putin’s war? And it’s not simply looking at the direct spending. Of course this is enormous, mind-boggling, the amounts of money that are being spent on bombs and troops and all of the trappings that are necessary to support a war of this scale and devastating scope.
The real cost is orders of magnitude larger. It’s the real consequences of economic growth. It’s the fact that the Russian economy is going to take many years to recover to its pre-invasion levels, at a minimum. But on top of that, it’s the opportunity cost. It’s how much the Russian economy could have grown absent this war but now will not. The cost is all of the incredibly skilled Russian people who have fled this – the country abroad. It’s very hard to put that in numbers. But that’s the focus that we should keep our eyes on without getting distracted by the day-to-day, near-term, month-to-month changes. This is absolutely, fundamentally a turning point for the future of the Russian economy.
MODERATOR: So we’ll end the Q&A session there. Thank you, Dr. Blanchard, for sharing your time with us today and thank you to all the journalists who joined us in person and online. Dr. Blanchard, I’ll give it to you for any final conclusion, thoughts.
MS BLANCHARD: Well, thank you so much for having me. This is the first time I’ve done a Foreign Press Center briefing, so apologies if I’m a little new at this. It’s my privilege to be here. Very happy for the work that journalists around the world do to bring light into the darkness and to keep us all informed, where facts are facts. So I appreciate your time very much and I encourage you to reach out; if we can help clarify or provide sources, we’re very happy to do that. Thank you.
MODERATOR: Thank you. That ends today’s briefing. Thank you.