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In the aftermath of Russia’s invasion of Ukraine, Western leaders heralded a sanctions regime that would cripple the country’s war machine.

Joe Biden claimed Russia’s economy would be “cut in half”, while Boris Johnson spoke of squeezing it “piece by piece.”

A year has passed, but that great promise has been slow to deliver.

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West ‘punished themselves’ with Russia sanctions

“The Russian economy and system of government have turned out to be much stronger than the West believed,” President Vladimir Putin said in a speech to the country’s parliament on Tuesday.

He was also flexing his muscles at an economic cabinet meeting last month: “Remember, some of our experts here in the country – I’m not even talking about Western experts – thought [gross domestic product] would fall by 10%, 15%, even 20%.”

Instead, Russia shrunk by a relatively modest 2.2% and it is expected to grow by 0.3% this year, according to the International Monetary Fund.

It means the sanctions-hit country will outperform Britain.

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Among Western leaders, these predictions will make for unpleasant reading.

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A look back on a year of war in Ukraine

Over the past year, sanctions have descended on Russia’s economy but, to the surprise of most economists, it has weathered the storm.

This is largely down to the country’s oil and gas reserves. Although Europe turned its back on Russian energy exports, the country was able to exploit delays in imposing the ban, which helped bolster its public finances.

Revenues held up strongly thanks to a global spike in energy prices and a successful reorientation of trade to China and India.

Russia was already sitting on a comfortable cushion.

Record high trade surpluses following the invasion came after years of conservative fiscal policies which allowed the country to amass a fund that it is now deploying in the war against Ukraine.

The country has been quietly sanctions proofing its economy for years.

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Landmarks light up for Ukraine

Russians are enjoying record low unemployment and wage growth that has helped them to weather the worst of rising inflation.

They’re still cautious about spending during times of economic uncertainty, but the government is trying its best to encourage them by hiking minimum wages and pensions.

While economic data is not wholly reliable, nor does it provide a full view of the strains Russian society is under, the domestic economy has not collapsed in the way some had warned.

President Putin is in a triumphant mood but it may not last for long as cracks are starting to show.

Oil revenues are slipping now that Western countries have introduced a price cap on Russian Urals, its main crude export blend, and the country’s public finances are deteriorating as a result.

At the same time Russia is having to ramp up military spending and is relying on sales of foreign currency – Chinese yuan – to support the rouble. Last year may have exceeded expectations, but the sting of Western sanctions is only just starting to be felt.

Jobs

Living standards in Russia have been supported by record high wage growth and low unemployment.

When the war first broke out, analysts expected the departure of foreign companies to lead to mass job losses.

Instead, unemployment fell to a record low of 3.7% as Western firms handed over their businesses to local partners, which helped to maintain employment.

However, the headline unemployment rate is disguising a massive drop in the size of the workforce.

Hundreds and thousands of skilled workers have left or fled the country, either to fight or find work elsewhere – estimates range from 0.4% to 1.4% of Russia’s workforce. This is weighing on economic growth, with the country’s central bank warning recently: “The capacity to expand production in the Russian economy is largely limited by the labour market conditions.”

As in Britain, where a shrinking labour market is affecting the country’s economic outlook and putting pressure on inflation, Russia’s fortunes will also depend on how well the size of its workforce recovers.

Tatiana Orlova, economist at Oxford Economics, said: “There is anecdotal evidence that some of those who left in panic in March or September have since returned, due perhaps to their being unable to find an equivalent job abroad or because they still had family and property back in Russia.”

Wages

The tight labour market has led to robust wage growth – especially for IT professionals, construction workers and hospitality staff – which is boosting living standards. Wage growth in Russia is almost keeping pace with inflation and the government is hiking pensions and the national minimum wage, which will go up by another 10% next January after rising by 20% last year.

Consumer spending

Oil revenues get a lot of attention but consumer spending is still the dominant part of the country’s economy and the government is hoping that the extra money will encourage Russians to go out and spend, something they have been cautious about indulging in over the past year.

It may have a large task on its hands, however. Many analysts expect Russia to launch a new offensive in the coming weeks in an effort to capture the whole of Donbas. If the country’s leadership announce a new wave of mobilisation then consumer confidence will likely drop again, causing households to prioritise saving over spending.

“The savings-to-disposable income ratio will rise again and stay elevated until the fighting abates, hampering authorities’ efforts to revive household demand,” Ms Orlova said.

Business investment

Another round of mobilisation could also start weighing on business confidence. In the early days of the conflict economists were convinced that business investment would collapse at its fastest pace in decades but that did not happen.

Bumper profits for oil, gas and fertiliser producers helped fund business plans, with fixed investment increasing by 6% in 2021.

As Russia diverted its energy exports to Asia, the country required a massive increase in infrastructure.

This also helped boost the country’s manufacturing sector, although not uniformly. The country’s car industry, for example, collapsed last year as manufacturers struggled to access key component parts and tools from the west. Others are coping by accessing parts from Turkey, which is yet to participate in the international sanctions.

A general view shows oil tanks at the Bashneft-Ufimsky refinery plant (Bashneft - UNPZ) outside Ufa, Bashkortostan, January 29, 2015. Russia's Economy Ministry will base its main macroeconomic development scenario for 2015 on an oil price of $50 per barrel, Minister Alexei Ulyukayev said on Thursday. REUTERS/Sergei Karpukhin (RUSSIA - Tags: BUSINESS ENERGY INDUSTRIAL POLITICS)

Oil and gas

Attempts to strangle Russia’s economy were immediately stifled by Europe’s heavy reliance on Russian oil and gas exports, which make up about 40% of the country’s revenues.

Russia successfully exploited this.

In the nine months that it took for the EU to agree and implement a bloc-wide ban on Russian oil exports, Putin’s regime enjoyed record fiscal surpluses as the country benefited from soaring wholesale prices, with its current account surplus jumping by 86% to $227.4bn.

This gave Russia a giant cushion to help fund the war effort and strengthened its currency, helping keep the price of imports low and dampening inflation.

During this time the country was also able to redirect supply to India and China, where its overall crude and fuel oil exports reached a record high of 1.66 million barrels a day last month.

A more challenging 2023

This year will be more challenging.

The country’s public finances are already starting to weaken as lower energy prices weigh on revenues. A $60 a barrel price cap on Russian crude oil – imposed by the EU, G7 and Australia in December – means the country is being forced to sell oil at a considerably discounted price compared to the global Brent benchmark.

The cap was recently extended to refined petroleum products as well.

Russia’s budget deficit came in at £20.8bn in January as income from oil and gas fell by 46% over the year. At the same time, government spending increased by 59% over the year.

Economists identified these as early signs of strain, with the country having to sell more Chinese currency and issue local debt to support itself.

However, they were still relatively sanguine about the country’s prospects.

Sofya Donets, chief Russia economist at Renaissance Capital, said: “The fiscal deficit expanded in 2022 but remained still moderate at 2% – below the pandemic or the great financial crisis levels.”

She added: “With the public debt below 20% of GDP the financing is hardly an immediate source of the stress, though a sustainable decrease in oil and gas revenues will call for a medium-term fiscal consolidation and non-oil tax increase, we believe.

“This consolidation, however, is yet not that urgent and could be delayed by up to two years, we assume.”

Analysts said the country had scope to increase the tax intake by levelling windfall tax on energy and fertiliser producers.

Crucially, Russia is able to meet its financing needs comfortably at home.

Both the government and corporations have very low levels of external debt and the government has built up a robust sovereign wealth fund.

“We need to remember Russia has spent the best part of 10 years sanctions proofing its economy,” said Liam Peach of Capital Economics.

“What all this meant was being cut out of global capital markets and sanctions on various corporates, banks and the government didn’t really have much of an impact on their financial needs, because they were quite low. So Russia’s government, for example, could go eight months without issuing any debt.”

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UK’s biggest housebuilders to pay record sum after CMA investigation into sensitive information-sharing

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UK's biggest housebuilders to pay record sum after CMA investigation into sensitive information-sharing

The UK’s biggest housebuilders are set to pay a record sum to fund affordable housing after the competition regulator investigated sensitive information sharing among the firms.

A total of £100m, paid for by seven companies, will go to affordable housing programmes across England, Scotland, Wales and Northern Ireland, following a Competition and Markets Authority (CMA) investigation.

The inquiry was launched last year due to concerns that the companies were sharing commercially sensitive information, which could influence the prices of new homes.

There was concern that the housebuilders – Barratt Redrow, Bellway, Berkeley Group, Bloor Homes, Persimmon, Taylor Wimpey and Vistry – exchanged details about property sales, including pricing, viewing numbers and buyer incentives such as upgraded kitchens or stamp duty contributions.

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It’s resulted in an agreement to make the combined £100m payment – the largest secured via a commitment from companies under CMA investigation. Hundreds of new homes could be funded with the money, the CMA said, helping low-income households, first-time buyers and vulnerable people.

The businesses have voluntarily agreed to pay the sum and have not acknowledged wrongdoing. No finding of rule-breaking or illegality has been made.

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What next?

They have also offered to sign up to legally binding commitments to prevent anticompetitive behaviour.

Among the proposals advanced by the companies was an agreement not to share some information, like prices houses were sold for, with other housebuilders, except in limited circumstances, and to work with the Home Builders Federation and Homes for Scotland to develop industry-wide guidance on information sharing.

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The CMA has said it will consult on the changes.

If accepted, the commitments will become legally binding, and the CMA will not need to decide whether the housebuilders broke competition law.

Initially, eight companies were under investigation, but following a merger of Barratt Homes and Redrow, the number became seven.

“Housing is a critical sector for the UK economy and housing costs are a substantial part of people’s monthly spend, so it’s essential that competition works well. This keeps prices as low as possible and increases choice,” the CMA chief executive, Sarah Cardell, said.

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At least 13 people may have taken their own lives linked to Post Office scandal, public inquiry finds

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At least 13 people may have taken their own lives linked to Post Office scandal, public inquiry finds

At least 13 people may have taken their own lives after being accused of wrongdoing based on evidence from the Horizon IT system that the Post Office and developers Fujitsu knew could be false, the public inquiry has found.

A further 59 people told the inquiry they considered ending their lives, 10 of whom tried on at least one occasion, while other postmasters and family members recount suffering from alcoholism and mental health disorders including anorexia and depression, family breakup, divorce, bankruptcy and personal abuse.

Follow latest on public inquiry into Post Office scandal

Writing in the first volume of the Post Office Horizon IT Inquiry report, chairman Sir Wyn Williams concludes that this enormous personal toll came despite senior employees at the Post Office knowing the Horizon IT system could produce accounts “which were illusory rather than real” even before it was rolled out to branches.

Sir Wyn said: “I am satisfied from the evidence that I have heard that a number of senior, and not so senior, employees of the Post Office knew or, at the very least, should have known that Legacy Horizon was capable of error… Yet, for all practical purposes, throughout the lifetime of Legacy Horizon, the Post Office maintained the fiction that its data was always accurate.”

Referring to the updated version of Horizon, known as Horizon Online, which also had “bugs errors and defects” that could create illusory accounts, he said: “I am satisfied that a number of employees of Fujitsu and the Post Office knew that this was so.”

The first volume of the report focuses on what Sir Wyn calls the “disastrous” impact of false accusations made against at least 1,000 postmasters, and the various redress schemes the Post Office and government has established since miscarriages of justice were identified and proven.

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‘It stole a lot from me’

Recommendations regarding the conduct of senior management of the Post Office, Fujitsu and ministers will come in a subsequent report, but Sir Wyn is clear that unjust and flawed prosecutions were knowingly pursued.

“All of these people are properly to be regarded as victims of wholly unacceptable behaviour perpetrated by a number of individuals employed by and/or associated with the Post Office and Fujitsu from time to time and by the Post Office and Fujitsu as institutions,” he says.

What are the inquiry’s recommendations?

Calling for urgent action from government and the Post Office to ensure “full and fair compensation”, he makes 19 recommendations including:

• Government and the Post Office to agree a definition of “full and fair” compensation to be used when agreeing payouts
• Ending “unnecessarily adversarial attitude” to initial offers that have depressed the value of payouts, ⁠and ensuring consistency across all four compensation schemes
• The creation of a standing body to administer financial redress to people wronged by public bodies
• Compensation to be extended to close family members of those affected who have suffered “serious negative consequences”
• The Post Office, Fujitsu and government agreeing a programme for “restorative justice”, a process that brings together those that have suffered harm with those that have caused it

Regarding the human impact of the Post Office’s pursuit of postmasters, including its use of unique powers of prosecution, Sir Wyn writes: “I do not think it is easy to exaggerate the trauma which persons are likely to suffer when they are the subject of criminal investigation, prosecution, conviction and sentence.”

He says that even the process of being interviewed under caution by Post Office investigators “will have been troubling at best and harrowing at worst”.

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‘Hostile and abusive behaviour’

The report finds that those wrongfully convicted were “subject to hostile and abusive behaviour” in their local communities, felt shame and embarrassment, with some feeling forced to move.

Detailing the impact on close family members of those prosecuted, Sir Wyn writes: “Wives, husbands, children and parents endured very significant suffering in the form of distress, worry and disruption to home life, in employment and education.

“In a number of cases, relationships with spouses broke down and ended in divorce or separation.

“In the most egregious cases, family members themselves suffered psychiatric illnesses or psychological problems and very significant financial losses… their suffering has been acute.”

The report includes 17 case studies of those affected by the scandal including some who have never spoken publicly before. They include Millie Castleton, daughter of Lee Castleton, one of the first postmasters prosecuted.

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Three things you need to know about Post Office report

She told the inquiry how her family being “branded thieves and liars” affected her mental health, and contributed to a diagnosis of anorexia that forced her to drop out of university.

Her account concludes: “Even now as I go into my career, I still find it so incredibly hard to trust anyone, even subconsciously. I sabotage myself by not asking for help with anything.

“I’m trying hard to break this cycle but I’m 26 and am very conscious that I may never be able to fully commit to natural trust. But my family is still fighting. I’m still fighting, as are many hundreds involved in the Post Office trial.”

Business Secretary Jonathan Reynolds said the inquiry’s report “marks an important milestone for sub-postmasters and their families”.

He added that he was “committed to ensuring wronged sub-postmasters are given full, fair, and prompt redress”.

“The recommendations contained in Sir Wyn’s report require careful reflection, including on further action to complete the redress schemes,” Mr Reynolds said.

“Government will promptly respond to the recommendations in full in parliament.”

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Public finances in ‘relatively vulnerable position.’, OBR warns

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Public finances in 'relatively vulnerable position.', OBR warns

The UK’s public finances are in a “relatively vulnerable position”, the government’s official forecaster has warned.

The Office for Budget Responsibility (OBR) cited a drag from successive economic shocks, recent U-turns on spending cuts and higher-than-expected policy commitments.

It sounded alarm over the projected path for debt as a result, in its annual fiscal risks and sustainability report.

It saw total debt above 270% of gross domestic product (GDP) by the early 2070s – up from a current level of 96.5% – declaring that rising debts have led to “a substantial erosion of the UK’s capacity to respond to future shocks”.

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The OBR’s report highlighted damage from the COVID pandemic and cost of living crisis that followed Russia’s invasion of Ukraine.

But it raised fears that past and current government policies were further harming the sustainability of the public finances.

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The report said that the pension triple lock, for example, was now estimated to cost £15.5bn annually by 2029-30.

That was “around three times higher than initial expectations”, it said.

The lock, which rises each year in line with inflation, wage growth or 2.5% – whichever is higher – had risen by more than the 2.5% base in eight of the 13 years of operation to date, the report stated.

The watchdog said it reflected more volatile inflation than expected.

It also picked up on the latest government U-turns over planned welfare and winter fuel payment cuts in the face of rebellions by Labour MPs.

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Welfare U-turn ‘has come at cost’

The decisions are expected to leave Chancellor Rachel Reeves facing a black hole of £6.75bn while weaker-than-expected economic growth could add a further £9bn to that sum in the run-up to the autumn budget, according to Sky News projections that see a void of around £20bn.

The OBR highlighted future risks from rising defence spending and the impact of climate change.

Public sector pay demands could also prove a drag, with resident doctors voting in favour of strikes over pay.

While ministers acknowledge damage to the public purse from the U-turns, Ms Reeves has repeatedly ruled out a new wave of borrowing to fund a spending spree.

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Could the rich be taxed to fill black hole?

As such, the government has not ruled out the prospect of some form of wealth tax to help meet its commitments despite the top 1% of earners contributing almost a third of all income tax already – on top of other targeted taxes such as capital gains.

The report said: “Efforts to put the UK’s public finances on a more sustainable footing have met with only limited and temporary success in recent years in the aftermath of the shocks, debt has also continued to rise and borrowing remained elevated because governments have reversed plans to consolidate the public finances.

“Planned tax rises have been reversed, and, more significantly, planned spending reductions have been abandoned.”

Shadow chancellor Mel Stride said of the report: “The OBR’s report lays bare the damage: Britain now has the third-highest deficit and the fourth-highest debt burden in Europe, with borrowing costs among the highest in the developed world.

“Under Rachel Reeves’ economic mismanagement and Keir Starmer’s weak leadership, our public finances have become dangerously exposed – vulnerable to future shocks, welfare spending rising unsustainably, taxes rising to record highs and crippling levels of debt interest.

“Labour’s recklessness risks it all – your pension, your job, your home, your savings.”

A Number 10 spokesman said: “We recognise the realities set out in the OBR’s report and we’re taking the decisions needed to provide stability to the public finances.”

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