The Russian economic forecast has been significantly scaled down for 2014, with even the country’s Finance Minister, Anton Siluanov, predicting zero GDP growth because of the Ukraine crisis.
Siluanov announced today that the Russian economy is facing “the most difficult conditions since the 2008 crisis.”
In March, Russia’s Deputy Economy Minister, Andrei Klepach, predicted capital flight reaching $70 billion by the end of the first quarter. Capital flight refers to investors moving their money out of a country. Klepach added that his country is facing a combination of zero growth and rising inflation.
Capital flight, a growing problem
Mr Siluanov confirmed today that investors pulled $63 billion out of Russia during the first quarter of 2014. Russian news agencies say Siluanov mentioned figures ranging from $50 billion (ITAR-TASS) to $65 billion. At a Finance Ministry board meeting, he warned “GDP growth is estimated as rather low, 0.5%. Perhaps it will be around zero.”
Siluanov blames geopolitical instability – i.e. his country’s involvement in the Ukraine crisis – for the billions investors are transferring out of Russia. Investors are converting rubles into foreign currencies in a massive scale, he added.
Russian economy dependent on energy exports
Russia’s rapidly decelerating GDP growth will make the country even more dependent on oil and gas exports, and reveals an archaic economy in urgent need of modernization.
In January, the OECD said the Russian economy must become less depending on the volatile world market prices for natural resources; it added that productivity needs to improve and skills should match jobs more closely.
“Continuing capital flight lowers the opportunities for economic investment and creates risk of an unbalanced budget. The main reason for capital flight is instability in the way the geopolitical situation develops.”
Economic growth had already been slowing down before the Ukraine crisis began. In 2013, GDP growth had dropped to 1.3% per year compared to 4.3% in 2011.
Populism lowers Russian economic forecast
Despite its dwindling economy, Russia is immersing itself in a spending spree. Dmitry Medvedev, Russia’s Prime Minister, announced in Crimea that the government will raise people’s salaries and pensions and inject funds into the area’s infrastructure.
Siluanov seems to be becoming increasingly worried about Russia’s spending plans for the Crimea. He warned that making statements without analyzing the real needs of Sevastopol and the Crimea in general may not be the best approach.
Anton Siluanov says Dmitry Medvedev should not be promising expensive handouts to Crimea’s people.
More pessimistic forecasts from Russian analysts
The Moscow Times quotes Nikolai Kondrashov from the Development Center at the Moscow’s Higher School of Economics, who said “Given the existing trends the slowdown in economy may be even bigger. The center’s Russian economic forecast is much more pessimistic than Siluanov’s.”
Kondrashov’s team predict a considerable fall in exports and home demand. GDP may either not grow at all or even contract by up to 1.5%, depending on the falling ruble and inflation rates, they say.
“We expect the inflation rates to reach about 6% by the end of the year. However, if the ruble rates continue to fall, it may be even bigger.”
Vladimir Tikhomirov, head economist at Otkritie, a financial corporation, said that if the political situation gets worse, growth figures will drop further. The Ukraine crisis is only a part of Russia’s economic problems, which have been caused by larger issues, he said.
Tikhomirov said to the Moscow Times “The figures released prove once again that Russia is still highly dependent on the demand for its energy resources and the general structure of the economy has not changed much over the past years.”
Rather than pouring money into the economy, Tikhomirov advises improving the investment environment in the country and minimizing the state sector.
Douglas A. McIntyre, at 24/7 Wall St, sees Russia falling out of the top ten world economies soon. Russia is currently the seventh largest economy worldwide, based on GDP. Even a modest GDP contraction would push it out of the top ten spot. Russia’s GDP is only bigger than that of France, Brazil and the UK by a tiny amount.
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