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Russia economy stagnates as capital flight worsens

Russia's economy is stagnating as data showed on Wednesday that capital worth $75 billion has left the country so far this year following sanctions on Moscow over its involvement in Ukraine.

"We have for now a period of stagnation, or a pause in growth," Deputy Economy Minister Andrei Klepach was quoted as saying in an interview where he also said that GDP was flat from April to June after shrinking 0.5 percent in the first quarter.

Klepach, speaking to Interfax news agency, noted that the second-quarter figure of zero growth over the three months, previously unpublished, indicated that Russia had avoided a "technical recession"—two successive quarters of GDP decline.

But central bank data on capital flight showed investors are concerned about the state of the $2 trillion a year economy. Though the outflow slowed in the second quarter, the $75 billion that left in the six months to June already surpassed the $62.7 billion capital flight seen for the whole of last year.

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Despite a new commitment by President Vladimir Putin to avoid international isolation, Russia faces a threat of new sanctions over its role in the Ukraine crisis and growing signs that its economy is wilting under those already in place.

Deputy Finance Minister Sergei Storchak said on Tuesday that sanctions were having a "serious indirect impact" and warned of retaliation against further measures by the West.

The United States and the European Union have imposed visa bans and asset freezes on some companies and officials over Russia's annexation of Crimea from Ukraine, following the overthrow of a president in Kiev who was sympathetic to Moscow.

"We will never pursue isolationism. We will always be part of the international community," Putin said during a meeting in the Kremlin, signalling a desire to avoid more sanctions. He also called for better ties with the EU.

But Washington and Brussels have held out the possibility of more sanctions if pro-Russian separatist fighters do not wind down the conflict in eastern Ukraine.

The rouble has recovered in recent weeks to the levels of before the Ukraine crisis but the economy, heavily dependent on energy exports, is expected to hardly grow this year despite oil prices remaining highly supportive of the budget.

Recent central bank figures show Russians have been ditching the rouble for foreign currencies this year at the fastest rate in more than four years.

Former Finance Minister Alexei Kudrin has said that even without further Western punishment over Ukraine, sanctions may trim 1 to 1.5 percentage point off economic growth this year.

Damage from self-sanctions

Some economists say a recent slight revival in industrial output and growth data, as well as a rally in Russian shares, does not mean the damage has been avoided to an economy that was already stuttering before the problems in Ukraine.

"The real damage to the economy is potentially much more serious and comes from the voluntary self-sanctions taken by foreign investors, credit providers and some foreign companies active in Russia," Chris Weafer, a partner of Macro-Advisory, a consulting firm in Moscow, said in a note published by the European Leadership Network. "While not compelled legally to restrict activities in Russia it is clear that many investors and big international companies have suspended new deals in Russia and have cut risk exposure."

The central bank has said about $90 billion of capital could leave Russia this year. The World Bank and the International Monetary Fund have said capital flight may exceed $100 billion this year if the Ukraine crisis continues.

The IMF warned in a report earlier this month of the "chilling effect" from sanctions on investment that could force Moscow into economic isolation.

The Economy Ministry said recently it may revise upwards its 0.5-percent GDP growth forecast for this year.

The IMF kept its estimates unchanged at 0.2 percent earlier this month, saying it is too early to assume an improvement.

Alexander Morozov, chief economist for Russia at HSBC in Moscow, said that the recent GDP data concealed an underlying downward trend in the Russian economy.

"The ... spike in geopolitical tensions with the Russia-Ukraine standoff will likely have long-lasting negative effects on private fixed investment growth in Russia," Morozov said. "This will hamper Russia's economic recovery in 2014-15."

—By Reuters

Contact Europe: Economy

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