Russia's economic decline is in only in the early stages, and the country is masking significant 'degradation,' think tank says

• Russia's economic decline is still in the early stages, according to a London-based think tank.
• Talk of Russia's resilience ignores deep-seated issues in Moscow's finances.
• The nation is losing a huge amount of human capital as war in Ukraine drags on.

Russia's economy has significantly more degradation ahead of it, according to the Official Monetary and Financial Institutions Forum.

The London-based think tank pointed to comments from some economists, who say Russia's finances are holding up amid its grinding war in Ukraine and sanctions from Western countries. Economists and experts note that Russia has proved to be seemingly resilient so far, with the International Monetary Fund recently raising its growth target for the nation to 2.6% from 1.1 this year.

But talk of Russia's economic resilience is misguided, and there are deep-rooted issues that will continue to plague its economy, the think tank said.

"Russia is masking a process of significant economic degradation that will continue well into the future and further marginalise its global footprint," Mark Sobel, the US Chair of the OMFIF said in a note on Monday.

Russia's robust military spending has been a key factor in propping up its economic growth so far. But a deeper look into the Kremlin's finances shows a far bleaker picture: Russia's global share of world purchasing power has fallen to under 2%, down from around 4% before the 2008 financial crisis, Sobel said.

Meanwhile, there's evidence that Russia's energy revenues - a key source of income - are plummeting. Urals crude, Russia's flagship oil product, is now trading at a significant discount to the global benchmark. Russian oil traded around $68 a barrel on Tuesday, while Brent traded around $83 a barrel, according to data from Oilprice.com.

Countries also appear less willing to buy Russian crude since the West has resolved to enforce its trade restrictions on Russia. Over half of sanctioned Russian oil tankers are now idling at sea, Bloomberg reported this week.

That's complicated by a swarm of other problems Russia's economy is facing, such as roaring inflation, a weak ruble, and a record shortage of workers, which economists have warned will hinder future growth and productivity.

The country, for instance, is losing a huge amount of human capital as casualties mount on the battlefield, while younger educated Russians have fled the country, Sobel said.

"Inflation is elevated and the central bank is maintaining high interest rates in light of the outlook for prices. That will erode real incomes and crimp investment," he added.

Over 1,000 companies have publicly said they're withdrawing or scaling back operations in Russia, according to a list compiled by the Yale School of Management. Companies that have exited Moscow are unlikely to return anytime soon, Sobel added.

"A cursory examination of current Russian data — such as growth and inflation - might suggest the economy is 'resilient' in the face of the costs of Russia continuing its ruthless invasion. That view may contain elements of validity in the short term. But even that overlooks weaknesses and realities," Sobel warned. "Significantly greater isolation and economic degradation is baked into the cake for the Russian economy and people."

A record 56% of Russians said they believed their economy was improving last year.

But people in Russia already appear to be feeling the pain of Moscow's ailing finances. Heating systems are now breaking down in parts of Russia, partly due to Moscow's immense military budget that's been unable to update Soviet-era infrastructure. Russian inflation grew 7.2% year-per-year in January, well above the nation's 4% inflation target.