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Ukraine for Russia, just like Scotland for UK: VTB Bank CEO

Matt Clinch
Wednesday, 22 Jan 2014 | 4:31 AM ET
Ivan Vdovin | age fotostock | Getty Images

Russia remains very sensitive about its ties with the Ukraine, according to Andrey Kostin, the CEO of Russian banking group VTB, who said that the bond between the two nations is similar to the union between Scotland and Great Britain.

Speaking to CNBC at the World Economic Forum in Davos, Kostin said that Russia's relationship with the European Union was going in the wrong direction.

Protests have been staged in Ukraine - a former Soviet republic - and tensions have run high after President Viktor Yanukovich made a policy U-turn in November away from the European Union towards Russia.

Further clashes broke out in the Ukraine capital Kiev Wednesday between Ukrainian police and protesters demanding the resignation of President Viktor Yanukovich, with two demonstrators were reported to have been killed.

(Read more: Two feared dead as police clash with protesters in Ukraine)

"I don't think Russia will go along the path of deeper integration with the EU in the near future although the EU is still our major trading partner," he said.

"I don't know how English people feel about the referendum in Scotland but we definitely have a lot of feeling about the Ukraine." Scottish people face a vote later this year to decide whether the country gains independence from the United Kingdom.

Timothy Ash, the head of emerging market research at Standard Bank said that Russia doesn't understand the right of the Ukraine to be independent. He said that Kostin's view would sum up the general opinion in Russia.

"The difference is that the U.K. government would accept Scottish independence if the Scottish people vote for independence in the looming referendum," he said in a note.

"There have been no riots on the streets through this hole process building to the vote on the future of Scotland. If Scotland leaves the Union, it will be a Velvet departure, more akin to the split of Czechoslovakia."

Russian growth

Kostin also felt that growth in Russia is currently "very slow" but added that investors shouldn't worry about a recession.

"I agree that growth is very slow and that's raised lots of concern for the government, for the business community," he told CNBC on Wednesday.

The comments come amid a raft of economic problems sparking concern both inside and outside Russia.

Before the financial crisis hit in 2008, Russia clocked-up economic growth of around 8 percent, but its economy has slowed dramatically. Growth averaged just 1.3 percent in the January to November 2013 period.

The International Monetary Fund (IMF) expects Russia's gross domestic product (GDP) to have expanded by just 1.5 percent in 2013, following a contraction in investment as a series of large energy and public sector projects were completed.

(Read more: Putin defianton spending plan despite Russia downturn)

The IMF forecasts growth to pick up slightly in 2014 to 2 percent, on the back of stronger exports and a recovery in investment, although Russia's Economy Ministry forecasts growth of 2.5 percent for the year.

Inflation is also a concern in Russia, following a flood of investment into the country during the boom years, leading to a rise in the standard of living and cost of goods. This created a sticky inflation problem that the central bank is still struggling to contain. Indeed, above-target inflation means the central bank can't lower interest rates to stimulate the economy.

(Read more: How wealthyis Russian President Vladimir Putin?)

Consumer prices rose 6.5 percent in December 2013 from a year earlier, according to the country's Federal Statistics Service. This was the sixteenth month that inflation remained above the central bank's target of between 5-6 percent.

(Read more: What next for Khodorkovsky after his Russian release?)

But despite concerns surrounding both growth and inflation, Putin insisted there was no reason to abandon spending pledges made in his December "State of the Nation Address." When Putin took office for a third presidential term in 2012, he pledged to increase spending on a range of state sectors including education and defence, and to raise state workers' salaries.

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop and Google

Contact World Economy

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