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Sanction-hit Russian economy nears recession

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(Globalpost/GlobalPost)

The Russian economy is nearing recession, officials said Tuesday, with punishing Western sanctions over the Ukraine conflict set to keep growth at ultra-low levels and drive up inflation.

"The economy is close to recession," said Oleg Zasov, the head of forecasting at the economy ministry, according to Russian news agencies.

The ministry held its forecast at growth of just 0.5 percent this year, compared with 1.3 percent in 2013.

A month ago, it had defiantly predicted growth of 1.0 percent when the West imposed its first sectoral sanctions over Moscow's support for pro-Russian rebels fighting in eastern Ukraine.

But it has now slashed its forceast for 2015 in half, also to 1.0 percent.

Russia's statistics office reported earlier this month that the economy grew by 0.8 percent in the second quarter on an annual comparison.

Seasonally-adjusted quarterly data has yet to be released, which could show that Russia entered a technical recession as the economy contracted by 0.5 percent in the first three months of the year.

Zassov said the seasonally-adjusted second quarter figure was "close to zero".

However, he added: "We estimate that the situation will improve a bit in the third quarter and we'll have a positive figure."

The head of the finance ministry's long-term planning unit said the economy ministry's annual forecast was too optimistic and that growth this year was likely to be close to zero.

- Flagging domestic demand -

The West last month imposed its toughest sanctions yet on Russia, including restricting access to Western financial markets, over Moscow's alleged attempts to destabilise Ukraine.

In response, Russia imposed sweeping bans on food from the United States, the European Union and a handful of other countries.

The borrowing restrictions crimp the ability of Russian banks to lend just as flagging domestic demand has choked off growth and the government wants domestic companies to step up investment to reduce their reliance on the West.

Officials have said that means the farm sector will need nearly $18 billion in additional investment to produce more of the country's food.

Zassov said the cut in the 2015 outlook was primarily due to reduced investment prospects in the face of continued geopolitical tensions.

"We had hoped that already next year investment would pick up significantly, above all in the private sector," he said.

"But we see now tougher loan conditions on foreign markets, the introduction of additional sanctions, which we hadn't counted on before."

The forecast for the flight of capital, which also deprives Russia of investment funds, was raised by $10 billion to $100 billion in 2015.

Exports are expected to tumble 8.0 percent this year against a previous forecast of a 4.0 percent slide.

Average Russians have been concerned the food bans will lead to rising prices, fears echoed in the economy ministry's latest inflation forecasts.

The forecast for this year was raised to 7.2 percent from 6.0, and for 2015 to 6.5 percent from 5.0 percent.

"The sanctions against Russia and our response played a certain role," acknowledged Zassov.

- Exposing weaknesses -

Russia enjoyed growth rates of 7-8 percent a decade ago during Vladimir Putin's first two terms as president, but the economy had already slowed before the Ukraine crisis erupted.

On Monday, Russia's economy minister urged an easing of budget rules to allow a bigger deficit to finance investments needed to overcome the West's punitive measures.

Some analysts believe the sanctions were useful in exposing weaknesses in the Russian economy and prodding the government to act.

"I think that the sanctions are playing a mobilising role for the growth of the economy," said Alexei Mukhin, director of the Centre for Political Information risk management company.

However others believe the Russian economy is in for a rough ride.

"The recession won't crash down like an avalanche, but gradually, and as is well known such crises hurt more," said Igor Nikolayev, head of the FBK Strategic Analysis Institute.

He forecast it will be worse than the previous crisis, when Russia's economy contracted by nearly 8.0 percent in 2009.

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http://www.globalpost.com/dispatch/news/afp/140826/sanction-hit-russian-economy-nears-recession-0