MOSCOW (AFP) ― Russia’s economy could contract by up to 1.8 percent this year because of the crisis in Ukraine, the World Bank said Wednesday.
The estimate amounts to one of the starkest warnings yet of the potential economic risks for President Vladimir Putin from his intervention in Crimea.
The Russian economy was already slowing sharply before the crisis over Ukraine, with analysts saying that Putin’s failure to enact structural reforms was having a direct negative impact on growth rates.
The World Bank said in its estimates on Wednesday that a high-risk outlook “if the geopolitical situation worsens” would result in “a contraction of 1.8 percent in 2014.”
“If the Russia-Ukraine conflict escalates, uncertainty could rise around political and economic sanctions from the West, and Russia’s response to them,” the World Bank said.
An employee changes ruble price signs above fresh vegetables inside an OAO Magnit store in Krasnodar, Russia. (Bloomberg)
It warned that the events in Crimea had led to a “a crisis of confidence” in Russia, leading to capital flight and depressed domestic demand.
The World Bank’s high-risk scenario “projects a contraction in output for 2014 of 1.8 percent as a result of a deeply negative investment shock and further slowdown in consumption growth,” it said.
The World Bank said that if the impact of the crisis in Crimea turned out to be short-term because it was resolved in “a peaceful fashion with some political tension remaining,” the economy could grow by 1.1 percent this year.
That is half a previous estimate in December.
It said that Russian banks could face new restrictions in accessing international capital markets and foreign investors could pull out money amid growing risks and falling profit margins.
Capital outflows are projected to “increase somewhat in 2014,” the report said.
The report’s main author, World Bank’s Russia expert Birgit Hansl, said that net capital outflows in the private sector were expected to be $150 billion in 2014 under the high-risk scenario.
She said that under the low-risk scenario, capital outflows would amount to $85 billion.
Russia’s deputy minister of economic development, Andrei Klepach, estimated on Monday that capital outflow reached $65-70 billion in the first quarter of 2014.
So far, the United States and the European Union have announced several rounds of targeted economic sanctions and travel bans against individual Russian officials and businessmen.
Both Fitch and Standard & Poor’s rating agencies lowered Russia’s outlook from stable to negative this week after U.S. President Barack Obama announced a new round of sanctions.
The World Bank said that even its high-risk scenario “assumes that the international community would still refrain from trade sanctions,” however, and is based on “heightened uncertainties around economic sanctions.”
Western powers have so far refrained from wider sanctions that would damage trade links with Russia, but the Group of Seven top economic powers said on Monday that they were ready to step up sanctions against Russia if it continued to escalate the situation in Ukraine.
The World Bank’s high-risk outlook assumed that there would be a recovery in 2015 with 2.1 percent growth of gross domestic product.
“In 2015, political tension could subside with an orderly resolution of the political crisis,” World Bank suggested.
In any case, the effects of the Crimean crisis will cause the Russian government to priorities short-term issues, while the “medium-term agenda of structural reforms will continue to take a back seat,” it predicted.
The World Bank made the predictions in its twice-yearly report on the Russian economy released in Moscow.
In December, The World Bank had projected growth in 2014 of 2.2 percent, down from its previous projection of 3.1 percent.
Russia’s growth in 2013 was just 1.3 percent, lower than projected.
Russia’s ruble plunged to record low values of 50.22 to the euro and 36.44 to the dollar on March 3, dubbed ‘Black Monday”, after Putin secured permission from the parliament for military intervention.
The ruble has since recovered some of its value to trade at 35.43 against the dollar and 48.92 against the euro on Wednesday.