JPMorgan says Russia's economy is doing much better than expected — and will only shrink 3.5% this year despite Western sanctions

• JPMorgan said Russia's economy is faring much better than expected, despite Western sanctions.
• The bank said gross domestic product would shrink just 3.5% in 2022, compared to a Wall Street consensus of 9.6%.

The Russian economy's downturn this year will be much milder than originally expected, with gross domestic product falling just 3.5% in 2022, according to new predictions from JPMorgan.

The bank's economists said in a note sent to clients on Friday that Russian economic data for May came in stronger than expected, with the manufacturing sector and consumer spending both appearing to stabilize.

"Meanwhile, the labor market displays little sign of distress," they said. Unemployment dipped to 3.9% in May from 4% in April.

The resilience in the Russian economy comes despite the tough sanctions imposed on the country over its invasion of Ukraine in late February, and the exodus of foreign companies.

Russia has, in part, been able to weather the storm somewhat better than expected because it's still exporting large amounts of energy. That's generated foreign currency with which the government has been able to prop up the ruble, helping to get a grip on inflation.

"Looking beyond political tensions the Russian economy is delivering upside surprises," JPMorgan said. "For now, Russia is tracking a far milder recession than had been feared when the invasion began."

JPMorgan raised its GDP forecast for 2022 to -3.5%, from -5% previously, well above the Wall Street consensus prediction of -9.6%.

However, the investment bank stressed it's still too early to gauge the full impact of sanctions on the Russian economy, which it said would likely weigh on growth for years.

It also said a reduction in commodity exports could hit the economy. The EU is planning to cut 90% of Russian oil imports by the end of the year, and the G7 last week said it was exploring a plan to cap the price of Russian oil. Analysts have said these moves could lead to relatively sharp drops in Russian exports.

Most economists expect Russia's economy to fare worse than JPMorgan. Economists polled by Bloomberg in June on average said Russia's GDP will fall 9.6% this year, although that was down from an average forecast of 10% in May. They also expect unemployment to jump to 7.4% by the end of the year, from 3.9% in May.