Russian GDP May Stall on Capital Flight, Siluanov Says

Russia’s economic growth may grind to a halt this year as capital flight accelerates in the wake of its annexation of Crimea last month, Finance Minister Anton Siluanov said.

Gross domestic product may expand less than 0.5 percent or may not grow at all, Siluanov told the ministry’s annual meeting today in Moscow. The slowdown is occurring as “geopolitical uncertainty” drives capital outflows, compounding the risk of a drop in the price of oil, Russia’s main export earner, he said.

U.S. and European sanctions triggered by President Vladimir Putin’s annexation of Crimea from Ukraine last month threaten to tip the $2 trillion-economy into recession after sagging investment last year slowed growth to a four-year low. With the risk of falling oil prices, the government’s scope for stimulus spending is limited, according to Siluanov.

“The conditions we have to work in in 2014 are probably the toughest since 2008-2009 crisis,” Siluanov said. “Capital outflows reduce the possibility for investment growth in the economy and create risks of an unbalanced budget.”

Capital outflows rose to $50.6 billion in the first three months of the year from $27.5 billion a year earlier, according to the central bank.

Deepening Sanctions

The ruble is down 9.1 percent against the dollar this year, the second-worst performer among 24 emerging-market currencies tracked by Bloomberg. The dollar-denominated RTS stock index has lost almost 21 percent compared with a 0.4 percent decline for the MSCI Emerging Market Index.

The U.S. and EU are discussing deepening sanctions against Russia, which they blame for stoking unrest in eastern Ukraine. Russia, which NATO says has 40,000 troops massed on Ukraine’s border, denies involvement and says the Kiev-based government isn’t protecting Russian-speaking citizens.

“We consider it impossible to increase budget spending given the considerable geopolitical risks,” Siluanov said. “One-time injections of budget funds aren’t capable of setting the economy on a path of sustainable growth.”

Russia is on the brink of a recession this quarter after gauges of manufacturing and services showed that seasonally adjusted output probably shrank for the first time since 2010 between January and March, HSBC Holdings Plc (HSBA) said April 3, citing data compiled by London-based Markit Economics.

‘Artificial Crisis’

Industrial production increased 1.4 percent in March from a year earlier, slowing from 2.1 percent growth in February, the Federal Statistics Service reported today.

Economic conditions continue to worsen, partly as “external forces” are trying to push the country toward an “artificial crisis,” Prime Minister Dmitry Medvedev said in Moscow today. First-quarter economic growth slowed to 1 percent from a year earlier, half the pace of the previous three months, according to Medvedev.

Russia will dip into its sovereign wealth funds next year to finance Crimea, suspending its budget rule to support the Black Sea peninsula, according to four people with knowledge of government discussions. Funding for the region, home to Russia’s Black Sea Fleet, will be at least 130 billion rubles ($3.6 billion) next year, another of the people said. All four asked not to be identified as planning is confidential.

Under the rule, spending is based on estimated income, excluding extra revenue from oil and gas sales, with a deficit of no more than 1 percent of gross domestic product. The extra oil and gas revenue is channeled to the Reserve Fund, one of Russia’s two sovereign funds, until it reaches 7 percent of GDP.

The Finance Ministry has fought to keep the budget rule unchanged as possible modifications are being considered.

“The situation is clearly bad,” Vladimir Osakovskiy, Moscow-based chief economist for Russia and the Commonwealth of Independent States at Bank of America Corp., said by phone. “Siluanov is trying to protect the budget goal and to highlight potential risks of uncontrolled budget spending increases.”

To contact the reporters on this story: Olga Tanas in Moscow at otanas@bloomberg.net; Milda Seputyte in Vilnius at mseputyte@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Andrew Langley, Paul Abelsky

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