MOSCOW: The Russian economy may contract markedly this year and the country could see record capital outflow of $150bn if the crisis over Moscow’s annexation of Ukraine’s Crimea deepens, the World Bank warned yesterday.
In the first estimate by a leading international institution of the likely economic damage from the Kremlin’s standoff with the West over Ukraine, the bank said Russia’s gross domestic product (GDP) might shrink by 1.8 percent in 2014.
“We assume that political risks will be prominent in the short-term,” the bank said in a report on the Russian economy. “If the Russia-Ukraine conflict escalates, uncertainty could rise around sanctions from the West and Russia’s response to them.”
The United States and European Union have called the takeover of Crimea illegal, and imposed asset freezes and visa bans on selected Russian and Crimean officials. These moves, and the threat of harsher sanctions if Moscow goes further by intervening in eastern Ukraine, have shaken Russian financial markets.
The forecast 1.8 percent contraction represents the World Bank’s high-risk scenario, but still assumes the international community will refrain from trade sanctions. In an alternative low-risk scenario, assuming only a short-lived impact from the Crimean crisis, the bank sees GDP growth of 1.1 percent this year, compared with the 2.2 percent it predicted in its last report in December. “No matter how the Crimean crisis plays out, there is the risk that the Russian government will be put back into a crisis mode to uphold macroeconomic stability,” the bank said.
“It is likely that policy choices will be about managing short-term issues, and the medium-term agenda of structural reforms will continue to take a back seat.”
Russian assets have rebounded this week, calmed for now by signs that the crisis may ease. But the situation remains fragile.
“An intensification of political tension could lead to heightened uncertainties around economic sanctions and would further depress confidence and investment activities,” the World Bank said in its report.
“Recent events around the Crimea have compounded the lingering confidence problem into a crisis of confidence,” said Birgit Hansl, the bank’s chief economist for Russia.
Deteriorating confidence has already led investors to transfer massive sums outside Russia. The Economy Ministry estimates net capital outflow at up to $70bn in the first quarter alone, compared with $63bn in the whole of last year. In the bleaker of its scenarios, the World Bank envisages capital outflow at $150bn this year and $80bn in 2015.
This year’s forecast exceeds the $120bn in capital flight that Russia saw in 2008 during the global financial crisis.Reuters
