Russia Faces Recession Risk as Capital Outflows Bleed Economy

Russia faces a growing risk of recession as a hemorrhaging of $100 billion in capital this year may bring the economy to a near standstill, according to analysts and government officials.

Gross domestic product will expand 1.2 percent in 2014, according to the median estimate of 37 economists in a Bloomberg survey. That compares with a 2.2 percent forecast in last month’s poll. The economy may stagnate at rates below 1 percent and contract if capital outflows reach $150 billion, Economy Minister Alexei Ulyukayev said at a conference in Moscow today.

Russia’s worst standoff since the Cold War against the U.S. and its allies over Ukraine is threatening to tip the economy into recession. Even before the conflict in Crimea, Russia was facing the slowest growth since 2009, with the $2 trillion economy of the world’s biggest energy exporter expanding 1.3 percent in 2013.

“We’ve downgraded our Russian forecasts quite substantially,” Wolf-Fabian Hungerland, an economist at Berenberg in Berlin, said by e-mail. “It was because of the current crisis.”

Russia faces a 45 percent probability of a recession within the next 12 months, according to the median estimate of 11 economists. That’s the highest since Bloomberg started to track the measure in June 2012.

The ruble declined for the first time in five days against the dollar, weakening 0.3 percent to 35.6300. Russia’s currency is down 7.6 percent versus the dollar this year, the worst performance among 24 emerging-market currencies monitored by Bloomberg after Argentine’s peso.

Sanctions, Outflows

President Vladimir Putin’s move to annex Ukraine’s Crimea peninsula this month prompted the U.S. and European Union leveling some sanctions on individuals, spurring capital flight. Outflows were probably near $70 billion in the first three months, Deputy Economy Minister Andrey Klepach told reporters on March 24. That compares with $63 billion in all of 2013.

The U.S. will enact further sanctions including sectoral measures against the Russian economy, according to 30 percent of economists in a separate Bloomberg survey. Banks and weapons manufacturers are the likeliest targets, followed by energy and mining. Stepped up economic sanctions by the EU are forecast by 10 percent of respondents.

More Sanctions?

“At the current state of things in Ukraine, neither the U.S. nor the EU will impose economic sanctions on Russia as it will be extremely harmful for the global economy,” Olga Kravets, an analyst at Aya Capital in the Ukrainian capital Kiev, said by e-mail. Even so, Russia’s incursion against its neighbor’s south-eastern regions will likely lead to “targeted sanctions against particular Russian economic sectors, most probably the energy sector.”

Under a “pessimistic” scenario, GDP will expand 0.6 percent, with growth reaching an estimated 1.8 percent in the optimistic case, according to Ulyukayev.

While the economy languishes, consumer prices may rise 5 percent to 6 percent in 2014, breaching this year’s 5 percent target, central bank Chairman Elvira Nabiullina said at the same conference in Moscow today.

The monetary authority raised its key interest rate at an emergency meeting on March 3 to 7 percent from 5.5 percent to curb inflation and ensure financial stability. Borrowing costs were held at a scheduled meeting on March 14, with the central bank saying rates won’t be cut it in the coming months.

Economists are forecasting that the benchmark will remain at 7 percent this quarter and end the year at 6.5 percent, according to a Bloomberg survey.

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