(Reuters) – The Russian economy is vulnerable after being hit hard by Western sanctions. However, it needs to be more open to imports and have greater freedoms. This was the conclusion of economists from VEB, the state development bank VEB, on Tuesday.

Due to double-digit inflation, the commodity-dependent economy plunges into recession after Russia invaded Ukraine with thousands of troops on February 24, prompting severe sanctions that have been imposed by the West. These sanctions isolated Russia from its economy and financial sector.

According to VEB economists, Russia requires a substantial increase in imports “critical” as well as those required for modernisation of the economy. They also need more investment in foreign assets.

Russia’s Economy Minister said that supply chain disruptions were the biggest challenges for the Russian economy and that imports must be reduced.

According to Evgeny Suvorov, CentroCreditBank analyst, Russia could have seen its imports drop by 70%-80% in April.

The scale of Russia’s isolationism is alarming. It could lead to dire consequences,” Suvorov stated.

VEB’s report titled “Russian economy under conditions of hybrid war” did not mention the Ukrainian conflict but stated that Russia needed “mobilisation, freedom and responsibility rather than a mobilization economy”.

VEB economists stressed the necessity to invest in the development of wealth, education and science. However, they said the economy was “fairly resilient to short-term as well as medium-term shocks but that a new, long-term policy must be implemented.”

The task of building state savings and foreign currency assets loses meaning under the West’s economic blockade.

Russia’s forex and gold reserves exceeded $600 billion when Moscow began what it called “a military special operation” in Ukraine. But, the West has placed sanctions on Russia that have frozen nearly half its state coffers.

VEB economists stated that they expect the gross domestic product will shrink to 10.2% by 2022 in its base scenario following 4.7% growth in 2021. The inflation rate to rise to 18.7% from 8.4%. This projection puts the central banks’ key interest at 12% for next year.

Under VEB’s baseline scenario, real disposable incomes will fall 9.2% in this year.

Dropping incomes can be a delicate issue due to rising costs and the impact on living standards. Since his inception, President Vladimir Putin promised real incomes to increase.

VEB economists stated that if the key rate is reduced to 8% at the central bank by 2022, from 14% currently, this will result in an additional increase of lending of 1 trillion rubles ($15 billion).

According to them, this could help decrease the GDP contraction by 0.4 percent.

($1 = 64.7520 roubles)