Russian GDP Growth Slows as Investment Sags on Sanctions

Russia’s first-quarter economic growth slowed to the weakest in a year as the standoff against the U.S. and its allies over Ukraine shrivels up investment.

Gross domestic product advanced 0.9 percent in January-March from a year earlier after a 2 percent gain in the previous quarter, the Moscow-based Federal Statistics Service said in an e-mailed statement, providing its first estimate of first-quarter GDP. That was above the 0.7 percent median estimate of 19 economists in a Bloomberg survey. The Economy Ministry had projected that output expanded 0.8 percent.

President Vladimir Putin’s move to absorb Crimea in March prompted U.S. and European Union sanctions, bringing the already slowing $2 trillion economy to a near standstill. The International Monetary Fund said April 30 that Russia is already in recession as U.S. and EU leaders warn that they are ready to take further measures if Ukraine’s May 25 presidential election is disrupted.

“Clearly the general trend is slowing economic growth,” Vladimir Bragin, head of research at Alfa Capital Partners Ltd. in Moscow, said by e-mail. “It’s evident in consumption, including through slower lending, and in investment, which has decelerated after the completion of large investment projects by state companies, as well as the completion of construction in Sochi.”

The ruble has weakened more than 5 percent this year against the dollar, the second-worst performance among 24 emerging-market currencies tracked by Bloomberg after Argentina’s peso. The Russian currency traded little changed at 34.7380 per dollar as of 5:50 p.m. in Moscow.

Capital Flight

Russian capital outflows in the first quarter were the largest since the last three months of 2008 when the collapse of Lehman Brothers Holdings Inc. triggered the biggest credit squeeze since the Great Depression. Net outflows totaled $50.6 billion, more than double the $17.8 billion that left in the previous quarter, according to the central bank.

“Investment weakness is due to a combination of much higher borrowing costs and the deterioration of the political and economic outlook. The latter is at least partly due to rising sanction risk from the West,” Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow, said by e-mail before the data release.

Sanctions Threat

The threat of sanctions is more “dangerous” for the economy than the effects of actual measures because it dries up investment, Economy Minister Alexei Ulyukayev said May 13. “Obviously, the role of this factor is big as we had a 4.2 percent drop in fixed-capital investment in the first quarter,” Ulyukayev said.

Russia may face technical recession, defined as two consecutive quarters of declining output compared with the previous three-month period. The economy is at risk of failing to grow or may even contract 0.1 percent in April-June compared with January-March, when GDP fell 0.5 percent, Ulyukayev said. The statistics office didn’t publish quarterly figures today.

GDP may grow 0.5 percent this year, Prime Minister Dmitry Medvedev said today at a government meeting in Moscow. The economy has recently faced “serious limits,” including a drop in investment and consumer demand, consistent capital outflows and an unfavorable global financial environment, Medvedev said.

First-quarter GDP data “lay to rest any lingering beliefs that Russia’s economy will prove to be relatively resilient in the face of the deepening crisis in Ukraine,” Neil Shearing, chief emerging-markets economist at Capital Economics Ltd., said in a research note.

To contact the reporter on this story: Olga Tanas in Moscow at otanas@bloomberg.net

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

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