Yellen of the Treasury says Russia’s war has weakened its economy

International Monetary Fund (IMF) Managing Director Kristalina Georgieva (L) and US Treasury Secretary Janet Yellen meet at the Treasury Department July 1, 2021 in Washington, DC.

Nicholas comb | AFP | Getty Images

Treasury Secretary Janet Yellen says Russia’s war on Ukraine has weakened its economy and slowed the country’s growth prospects for the foreseeable future.

“Russia’s economy is expected to contract this year and next,” Yellen said Thursday ahead of a meeting with European business officials at the International Monetary Fund and World Bank annual meeting in Washington, DC

Historic sanctions imposed by the US, EU and allies on Russia for its unprovoked invasion of Ukraine have cut the nation off from Western capital markets, with the larger aim of giving Russian President Vladimir Putin the proceeds to fund the war withdraw, says Yellen.

“Lost investments, including hundreds of private sector companies that have left the country and are unlikely to return, and constraints in Russia’s real economy will weigh on Russia’s growth prospects for years to come,” she said in a note released by the department.

The Finance Minister hosted a meeting with Valdis Dombrovskis, Executive Vice-President and Commissioner for Trade of the European Commission, and Paolo Gentiloni, the EU Commissioner for Economy.

Russia’s GDP is expected to contract by 6.2% this year and 4.1% next year, according to the Economist Intelligence Unit. The forecasts are “very large, both by historical and international standards,” Agathe Demarais, the unit’s global forecasting director, told CNBC in September.

The EIU also said that a European boycott of Russian oil would further drain the economy. The energy sector accounts for about a third of Russia’s GDP, including half of all tax revenue and 60% of exports, CNBC reported.

Yellen and Deputy Treasury Secretary Wally Adeyemo are backing the G-7’s strategic price cap on Russian oil at this week’s IMF meetings as an effective way to deny Russia revenue to continue the war in Ukraine.

Sanctions have also effectively left Russia dependent on “suppliers of last resort like Iran and North Korea for basic military equipment,” according to Yellen.

“At the same time, we have provided record amounts of both military and economic aid to Ukraine,” she added. “We see on the battlefield the military advantage that this growing inequality creates.”