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Russia sounds alarm after Western sanctions

russian economic sanctionsRussia’s economy is showing signs of a crisis, the government in Moscow said as the U.S. and the European Union announced sanctions over the country’s support for the Crimea region breaking away from Ukraine.

“The situation in the economy bears clear signs of a crisis,” Deputy Economy Minister Sergei Belyakov said in Moscow yesterday. The cabinet needs to refrain from raising the fiscal burden on companies, which would be the “wrong approach,” he said. “Taking money from companies and asking them afterward to modernize production is illogical and strange.”

Even before the worst standoff against the West since the Cold War, Russia’s economy was facing the weakest growth since a 2009 recession as consumer demand failed to make up for sagging investment. EU foreign ministers yesterday agreed to freeze assets and impose visa travel bans on 21 Russian, Crimean and former Ukrainian officials, while U.S. President Barack Obama imposed sanctions on seven Russians.

The Ukrainian crisis is putting a strain on Russia’s $2 trillion economy, which grew 1.3 percent in 2013 after expanding 3.4 percent previous year. Last year’s growth was “insufficient” and the current outlook and government forecasts “can’t satisfy us,” President Vladimir Putin said March 12. The Economy Ministry projects growth will average 2.5 percent a year through 2030.

Russia will probably dip into a recession in the second and third quarters of this year as “domestic demand is set to halt on the uncertainty shock and tighter financial conditions,” Vladimir Kolychev and Daria Isakova, economists at Moscow-based VTB Capital, said in a research note yesterday. They cut their 2014 growth estimate to zero growth from 1.3 percent.

The ruble has weakened 9.4 percent against the dollar this year, more than any other of the 175 currencies tracked by Bloomberg except the Argentine peso, the Ukrainian hryvnia, the Kazakh tenge, Zambian kwacha and the Kyrgyz som.

The currency’s slide, exacerbated by the intensifying tensions over Ukraine and the threat of sanctions, forced the central bank to look past sluggish growth and tighten monetary policy. Bank Rossii lifted its benchmark interest rate to 7 percent from 5.5 percent at an emergency meeting March 3.

Policy makers held borrowing costs at their regular meeting on March 14 and said the benchmark rate would remain unchanged in the coming months.

Consumer-price growth accelerated to 6.2 percent in February from a year earlier from 6.1 percent in January. Bank Rossii wants to keep inflation within 5 percent this year after missing its target range of 5 percent to 6 percent in 2013.

While Putin at a March 12 meeting with senior officials in Sochi called the economy “stable”, a range of economists cut their growth forecasts for this year.

Morgan Stanley (MS) economists Jacob Nell and Alina Slyusarchuk cut their forecast for 2014 growth to 0.8 percent from 2.5 percent according to a note to clients yesterday.

“We see Russia close to recession in the first half of 2014 as a result of the Ukrainian security crisis driving higher rates and risk premia, leading to weaker consumptions and contracting investment,” they wrote.

Capital outflow from Russia may reach $70 billion in the first quarter and there is “a real risk that this could push Russia into recession,” London-based Capital Economics said in a report published yesterday.

Even before the protests in Kiev turned deadly last month, Russian Deputy Economy Minister Andrey Klepach said capital outflows were increasing and may reach $35 billion in the first quarter, more than half of the $63 billion for all of 2013.

Vladimir Miklashevsky, a Danske Bank  economist in Helsinki, on March 14 lowered his estimate for 2014 growth to 1 percent from 2.6 percent, saying even that forecast was optimistic given the geopolitical environment.

“This monetary tightening could send Russia into recession even in 2014 as businesses and consumers will experience more difficulties with credit,” Miklashevsky wrote in a note to clients.

One way of helping accelerate growth would be to ease the costs of companies, Belyakov said yesterday. The total tax burden in the economy slightly fell to 33.3 percent of gross domestic product last year, Deputy Finance Minister Sergei Shatalov said at the same conference.

“From the business point of view, the fiscal burden, I think, is extremely high today for both the economy and companies,” Belyakov said.-Bloomberg