Russia’s economy was struggling even before the crisis in Ukraine, but things have now taken a turn for the worse, according to the International Monetary Fund. GDP fell in the first three months of 2014 and will fall again in the second quarter. According to the technical definition, that would amount to a recession.
The news will come as little surprise to the European Bank for Reconstruction and Development, which counts Russia as its biggest client. The EBRD believes there will be little or no growth this year even assuming there is no further escalation in the crisis.
Russia has five big problems. The first is that its manufacturing sector is uncompetitive after being starved of investment. The second is that the lack of a thriving industrial base has made the economy even more dependent on its oil and gas sector. The third is that a combination of a struggling economy, the Ukraine crisis and endemic corruption has led to capital flight. Goldman Sachs has estimated that up to $50bn (£30bn) has left Russia since the start of 2014 and that the full year figure could be as high as $130bn.
The fourth problem is that, with cash leaving the country and little or no investment coming in, the value of the rouble has fallen sharply. That has forced the central bank to push up interest rates, further depressing growth. Finally, there’s the threat of sanctions. These are not having a direct impact but the threat of tougher action to come is weighing down on confidence.
Analysts at Capital Economics say that a worsening of the crisis could lead to the Russian economy contracting by 5% in 2014.
The IMF and the EBRD hope that the fragile state of the Russian economy will make Vladimir Putin wary about ratcheting up the tension.
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