Russia ‘faces years of stagnation’ over Ukraine

Russia faces years of stagnation because of the Ukraine crisis and is ducking decisions needed to achieve a new economic model, former finance minister Alexei Kudrin told the Reuters Russia Investment Summit yesterday.

Kudrin, a long-time ally of Russian President Vladimir Putin, is one of the weightiest figures questioning government policy at a time when Russia is feeling the economic chill from confrontation with the West over Ukraine. A leading ‘liberal’, he shepherded Russia’s finances for over a decade before resigning in 2011 in a row over rising government spending.

“There will be stagnation, like now. There could be recession. We will be balancing on the edge of recession all the time,” he said, adding there would need to be a “renewal” of the government to achieve change.

Even if Western sanctions were not intensified further, he said, economic growth would be 1% lower than it would have been for at least three years. Russia also faces isolation from global market institutions for a similar length of time.

His predictions, which contrast with more optimistic official forecasts, will be sobering for investors hoping that the end of a conflict in eastern Ukraine would also mean an easing of Russia’s economic problems.

Kudrin told the Reuters Summit that depressed economic growth will be exacerbated by isolation from global markets. He expected that it would be years before Russia was able to borrow again on global financial markets. “I think that two to three years — this is the minimal time,” he said.

Another case in point is Russia’s attitude to the World Trade Organisation, which it joined in 2012, prompting hopes of economic liberalisation. “Russia in essence will temporarily not observe the rules of the WTO,” he said.

“I’m afraid that we’ll have an exclusionary regime for more than one year. I think it will happen for several years and it will be difficult to return.”

Although the Ukraine-related sanctions are set to weigh heavily, Kudrin said they were not the major reason why Russian economic growth was now stalling.

“Today the decline of Russian economic growth is not so much the result of sanctions as of the lack of reform of the economic system, at a time when the oil price is not rising but falling. We need another economic model,” he said.