News / Economy

IMF: Sanctions Bring Russian Economic Growth to Standstill

FILE - T-shirts, displaying images of Russia's President Vladimir Putin, are on sale at GUM department store in central Moscow, June 11, 2014. The sign reads
FILE - T-shirts, displaying images of Russia's President Vladimir Putin, are on sale at GUM department store in central Moscow, June 11, 2014. The sign reads "Made in Fatherland."
Reuters

Sanctions imposed on Russia over Ukraine have brought growth to a standstill, had a “chilling effect” on investment and could force Moscow into economic isolation, the International Monetary Fund said on Tuesday.

The international lender's report chimed with words from Russia's central bank governor, Elvira Nabiullina, who told a banking conference that growth was not only unsatisfactory but was putting the country in a difficult situation.

Russia has been hit by sanctions from the United States and European Union, prompting investors to pull out of a country where leaders have used the punitive measures to call for a more self-sufficient, or patriotic, course for the economy.

With the Fund keeping its growth forecast at 0.2 percent this year, and the Russian central bank's at 0.4 percent, both undercut the Economy Ministry's hopes that its 0.5 percent estimate would be beaten this year and come in closer to 1 percent.

“Even without the escalation [of the Ukrainian crisis], prolonged uncertainty and the resulting deterioration of confidence could lead to lower consumption, weaker investment, and greater exchange rate pressure and capital outflows than assumed under the baseline,” the IMF said in a report.

“Moreover, this risks derailing the reform agenda and a shift toward more emphasis on economic self-reliance rather than integration with the rest of the world.”

President Vladimir Putin has called for business leaders to repatriate their assets and reduce their dependence on Western financial markets after Russian officials, many of them his close allies, were targeted by the sanctions which included asset freezes and visa bans.

But measures to try to protect the economy failed to stop Russia losing $80 billion in capital flight in the first five months of the year, the rouble losing 10 percent of its value against the dollar and inflation spiking.

The governor of Russia's central bank, Elvira Nabiullina, said economic growth was too low, causing concerns about investing in Russia.

“The rouble's long-term stability is possible only by lowering the outflow of capital,” Nabiullina told a central bank conference in St Petersburg.

Some Russian officials have played down the impact of sanctions on the economy, but the IMF said the “chilling effect” would hurt an economy at a crossroads when it might dump attempts to diversify away from its oil dependence.

Capital flight

“This comes at a crucial moment when the old growth model based on energy and use of spare capacity has been exhausted and moving to a new growth model based on diversification requires new investment, including foreign technology,” the IMF said.

Antonio Spilimbergo, the IMF's mission chief to Russia, underlined the message to journalists on the sidelines of the St Petersburg conference, saying Moscow should not retreat.

“It's very important to be more integrated with the rest of the world, both financially and economically,” he said. “Now, the recent events are problematic... because it would be a big pity if this takes a toll on investment in the longer term.”

Firms are not spending on tangible assets, such as building and infrastructure, and capital expenditure has been falling month after month, down 2.6 in April.

Instead, money is flowing out of the country. The IMF estimates that capital outflows could reach $100 billion this year, in line with the Russian government's estimates.

The Fund said fiscal budget reserves, of around 0.3 percent of GDP last year, would cushion the overall budget balance from Crimea-related spending on infrastructure.

The Russian government revised down its budget surplus forecast on Tuesday to 0.4 percent.

“Under the baseline scenario, general government debt is expected to remain sustainable and low,” the IMF said.

Russia's sovereign debt to GDP ratio stood at around 12 percent last year, while many developed countries, such as Italy or Japan, carry a burden of 100 percent or more.

The IMF urged the Finance Ministry, however, to remain prudent in spending and when assuming the base oil price for budgetary purposes.

The energy sector accounts for one-fifth of Russia's gross domestic product, two-thirds of exports and around one-third of general government revenues.

“Additional fiscal measures, if needed, should be temporary and of high quality and be set in a medium-term framework that ensures sustainability,” the IMF said. “But additional fiscal consolidation in outer years is needed to rebuild buffers.”

The Finance Ministry manages two sovereign funds, the Reserve Fund and the National Wealth Fund, which stand at $87 billion each. The Reserve Fund, which is to cover budget shortcomings, is meant to reach ultimately 7 percent of GDP.

Last year, it stood at 4.3 percent.

“With the Reserve Fund below its target, the authorities risk pro-cyclical fiscal adjustments in the event of large and lasting oil price decline,” the IMF said.

“This risk is heightened given the already high level of oil prices. Staff argued for more prudent oil-price assumption during the budget process to generate more savings.”

The IMF says the central bank should raise rates to try to curb inflation, which it expects at 6.5 percent by the end of the year, above the central bank's estimate of around 6 percent.

The central bank's general target is 4.5 percent.

“Higher rates would also help reduce capital outflows that have emerged amid geopolitical tensions, global liquidity tightening and rate hikes by major emerging markets' central banks,” it added. 

You May Like

Turbulent Transition Imperils Tunisia’s Arab Spring Gains

Critics say new anti-terrorism laws worsen Tunisia's situation while others put faith in country’s vibrant civil organizations, women’s movement More

Burundi’s Political Crisis May Become Humanitarian One

United Nations aid agencies issue warning as deadly violence sends tens of thousands fleeing More

Yemenis Adjust to Life Under Houthi Rule

Locals want warring parties to strike deal to stop bloodletting before deciding how country is governed More

This forum has been closed.
Comments
     
There are no comments in this forum. Be first and add one

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Texas Town Residents Told to 'Just Leave' Ahead of Flood Threati
X
Greg Flakus
May 29, 2015 11:24 PM
Water from heavy rain in eastern and central Texas is now swelling rivers that flow into the Gulf of Mexico, threatening towns along their banks. VOA’s Greg Flakus visited the town of Wharton, southwest of Houston, where the Colorado River is close to cresting.
Video

Video Texas Town Residents Told to 'Just Leave' Ahead of Flood Threat

Water from heavy rain in eastern and central Texas is now swelling rivers that flow into the Gulf of Mexico, threatening towns along their banks. VOA’s Greg Flakus visited the town of Wharton, southwest of Houston, where the Colorado River is close to cresting.
Video

Video New York's One World Trade Center Observatory Opens to Public

From New Jersey to Long Island, from Northern suburbs to the Atlantic Ocean, with all of New York City in-between.  That view became available to the public Friday as the One World Trade Center Observatory opened in New York -- atop the replacement for the buildings destroyed in the September 11, 2001, attacks.  VOA’s Bernard Shusman reports.
Video

Video Seoul Sponsors Korean Unification Fair

With inter-Korean relations deteriorating over the North’s nuclear program, past military provocations and human rights abuses, many Koreans still hold out hope for eventual peaceful re-unification. VOA’s Brian Padden visited a “unification fair” held this week in Seoul, where border communities promoted the benefits of increased cooperation.
Video

Video Purple Door Coffeeshop: Changing Lives One Cup at a Time

For a quarter of his life, Kevin Persons lived on the street. Today, he is working behind the counter of an espresso bar, serving coffee and working to transition off the streets and into a home. Paul Vargas reports for VOA.
Video

Video Modular Robot Getting Closer to Reality

A robot being developed at Carnegie Mellon University has evolved into a multi-legged modular mechanical snake, able to move over rugged surfaces and explore the surroundings. Scientists say such machines could someday help in search and rescue operations. VOA’s George Putic reports.
Video

Video Shanghai Hosts Big Consumer Electronics Show

Electronic gadgets are a huge success in China, judging by the first Asian Consumer Electronics Show, held this week in Shanghai. Over the course of two days, more than 20,000 visitors watched, tested and played with useful and some less-useful electronic devices exhibited by about 200 manufacturers. VOA’s George Putic has more.
Video

Video Forced to Return Home, Afghan Refugees Face Increased Hardship

Undocumented refugees returning to Afghanistan from Pakistan have no jobs, no support system, and no home return to, and international aid agencies say they and the government are overwhelmed and under-resourced. Ayesha Tanzeem has more from Kabul.
Video

Video Britain Makes Controversial Move to Crack Down on Extremism

Britain is moving to tighten controls on extremist rhetoric, even when it does not incite violence or hatred -- a move that some are concerned might unduly restrict basic freedoms. It is an issue many countries are grappling with as extremist groups gain power in the Middle East, fueled in part by donations and fighters from the West. VOA’s Al Pessin reports from London.
Video

Video 3D Printer Makes Replica of Iconic Sports Car

Cars with parts made by 3D printers are already on the road, but engineers are still learning about this new technology. While testing the possibility of printing an entire car, researchers at the U.S. Department of Energy recently created an electric-powered replica of an iconic sports roadster. VOA’s George Putic has more.
Video

Video Al-Shabab Recruitment Drive Still on In Kenya

The al-Shabab militants that have long battled for control of Somalia also have recruited thousands of young people in Kenya, leaving many families disconsolate. Mohammed Yusuf recently visited the Kenyan town of Isiolo, and met with relatives of those recruited, as well as a many who have helped with the recruiting.
Video

Video A Small Oasis on Kabul's Outskirts Provides Relief From Security Tensions

When people in Kabul want to get away from the city and relax, many choose Qargha Lake, a small resort on the outskirts of Kabul. Ayesha Tanzeem visited and talked with people about the precious oasis.
Video

Video Kenyans Lament Losing Sons to al-Shabab

There is agony, fear and lost hope in the Kenyan town of Isiolo, a key target of a new al-Shabab recruitment drive. VOA's Mohammed Yusuf visits Isiolo to speak with families and at least one man who says he was a recruiter.
Video

Video Scientists Say Plankton More Important Than Previously Thought

Tiny ocean creatures called plankton are mostly thought of as food for whales and other large marine animals, but a four-year global study discovered, among other things, that plankton are a major source of oxygen on our planet. VOA’s George Putic reports.
Video

Video Kenya’s Capital Sees Rise in Shisha Parlors

In Kenya, the smoking of shisha, a type of flavored tobacco, is the latest craze. Patrons are flocking to shisha parlors to smoke and socialize. But the practice can be addictive and harmful, though many dabblers may not realize the dangers, according to a new review. Lenny Ruvaga has more on the story for VOA from Nairobi, Kenya.

VOA Blogs

World Currencies

EUR
USD
0.9115
JPY
USD
123.92
GBP
USD
0.6554
CAD
USD
1.2443
INR
USD
63.800

Rates may not be current.