Russia's growth slumps amid Ukraine crisis

15th May 2014, Comments 0 comments

Russia on Thursday reported a sharp slowdown in economic growth in the first quarter that analysts attributed to fallout from the raging crisis in neighbouring Ukraine.

The state statistics agency said the Russian economy grew by 0.9 percent between January and March over the same period last year.

The figure represented an improvement from an initial 0.8 percent estimate but a steep decline from the 2.0 percent figure seen in the last quarter of 2013.

"While GDP data published earlier today show that the rest of emerging Europe is recovering, the region's largest economy -- Russia -- looks as though it may be in recession," said emerging markets economist Neil Shearing of Capital Economics.

The International Monetary Fund last month said Russia was already in a technical recession after estimating that it had recorded two consecutive readings of negative quarter-on-quarter growth.

Top Moscow officials have also said in recent weeks that the economy might register no growth at all in 2014 should the West follow through with its threat to impose sanctions on key sectors of Russia's economy such as energy and the arms industry.

The United States and the European Union are mulling broader sanctions against Russia for its alleged attempts to splinter Ukraine by backing separatist militants in the east of the ex-Soviet state.

Economists attribute Russia's slowdown in part to nearly $100 billion in investment capital that is believed to have fled the country this year because of the looming sanctions threat.

"The sharp drop in investment in the first quarter is the most obvious culprit for the decline," UBS economist Anna Zadornova said in a report.

"We believe it is no longer justified to expect investment to pick up materially anytime soon, particularly as the geopolitical tensions... may persist for a long time," Zadornova wrote.

Economy Minister Anton Siluanov stressed on Thursday that he still expected the economy to expand by 0.5 percent this year.

But he also admitted that Russia's current growth forecast may be "a bit optimistic".

Prime Minister Dmitry Medvedev for his part told a government meeting that Moscow had to objectively face the expanded sanctions threat.

Policymakers must take account of "the serious limitations that Russia has recently faced -- particularly the drop-off in investment and consumer demand."

"We must assess all these factors objectively, without euphoria or excessive drama -- in other words, calmly," Medvedev said.

- 'Small contraction' -

The economic deterioration contrasts sharply with the seven percent growth that Russia averaged thanks to soaring prices on its oil exports during Vladimir Putin's first two terms as president between 2000 and 2008.

But Putin's popularity ratings are still touching record highs as patriotic fervour sweeps the nation in response to Russia's annexation of Ukraine's Crimea peninsula.

The sanctions that the West has unveiled against Russia have thus far lacked much bite because they only target a few Kremlin-linked companies and officials believed to have been involved in Moscow's Crimea swoop.

But both EU and US officials are now mulling sanctions against specific sectors of Russia's economy should Moscow be deemed to have stood in the way of Ukraine having free and fair presidential elections on May 25.

Shearing of Capital Economics said the latest data from Moscow should "lay to rest any lingering beliefs that Russia's economy will prove to be relatively resilient in the face of the deepening crisis in Ukraine."

"We expect a small contraction in the second quarter," UBS economist Zadornova agreed.

© 2014 AFP

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