Russia acknowledges economy is in crisis

Russia’s government has acknowledged for the first time that the economy is in crisis, undermining earlier attempts by officials to suggest weakening growth could weather sanctions over Ukraine.

Moscow markets wait to see the full scale of western measures over the seizure of Crimea and support of its referendum to join Russia, after losing billions of dollars in recent weeks in state and corporate money. For weeks, Russian officials have said the clash between Moscow and the West over Ukraine that threatens economic sanctions and asset freezes would “weigh on the economy”.

Although not speaking directly about the impact of the conflict, deputy economy minister Sergei Belyakov said yesterday the economy was in trouble.

European officials have said they are determined to hit Russia for its actions in Crimea, imposing sanctions including travel bans and asset freezes on those responsible. The United States is expected to take similar steps.

“People are most afraid of sanctions. Their volume and what sanctions there will be and how this will be reflected on the Russian financial system, the economy, the markets and the largest companies,” said Konstantin Chernyshev, head of research at Uralsib in Moscow.

Many economists expect Russia to enter recession and most have rushed to slash their growth forecasts as a result of the worst showdown between Russia and the West since the fall of the Berlin Wall.

“Domestic demand is set to halt on the uncertainty shock and tighter financial conditions, likely dipping the economy into a recession over second and third quarter of 2014,” Vladimir Kolychev and Daria Isakova, economists at VTB Capital said.

“We are lowering our full-year growth outlook to 0.0%, and see downside risks if uncertainty remains elevated for a protracted period and/or severe sanctions are imposed.”

The Economy Ministry’s most recent estimates, issued before the escalation of the Ukrainian crisis, envisage the economy expanding by around 2% this year.

Economists have warned ever since President Putin declared on March 3 a right to invade Ukraine to defend the Russian-speaking population that the price Moscow will pay for its decisions will be hefty.

The rouble-denominated MICEX index has lost more than $66bn (€47.4bn) in market capitalisation and the central bank has spent more than $16bn (€11.49bn) of its reserves to defend the rouble. Only last week, MICEX lost 7.6% and the dollar-denominated RTS more than 8%.

In a matter of a few weeks Russia has gone from being perceived as one of the more resilient emerging markets to the withdrawal of the United States monetary stimulus to one of the most vulnerable developing countries, analysts said.