Europe News

IMF slashes Russia growth forecast, warns of outflows

Russia wants leverage over Kiev: Pro
Russia wants leverage over Kiev: Pro

The International Monetary Fund (IMF) mission chief to Moscow said Wednesday that Russia's growth forecast for the year had been cut from 1.3 percent to 0.2 percent, adding that Russia was currently "experiencing recession."

Antonio Spilimbergo also announced that the Russian Federation would witness outflows of $100 billion in 2014, explaining to reporters that international sanctions imposed on Moscow by the U.S. and the EU regarding the Ukraine crisis were hurting the Russian economy. He argued that a resolution to the ongoing crisis would reduce the country's economic uncertainties.

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"If you understand by recession two quarters of negative economic growth then Russia is experiencing recession now," Spilimbergo said.

Spilimbergo's comments came after the Russian economy contracted in the first three months of this year and following further sanctions imposed by the U.S. and the EU at the start of this week.

President Barack Obama announced on Monday that the White House had frozen assets and imposed visa bans on seven Russians close to President Vladimir Putin and sanctioned 17 Russian companies.

Obama said the sanctions were imposed to stop the Russians from fomenting rebellion in eastern Ukraine. However, on Wednesday pro-Russian separatists seized control of state buildings in the east Ukrainian town of Horlivka.

The town is just to the north of Donetsk, where other Russian-speaking separatists declared a "People's Republic" and plan a referendum on secession on May 11, similar to vote that took place in Crimea.

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Otilia Dhand, vice president at Teneo Intelligence, said the response of further sanctions from the West was "to try to calm down the situation in eastern Ukraine in order to empower the Kiev government to handle the situation on their own. Obviously the EU interest is to continue on the path of at least signing and implementing the Association Agreement for Ukraine."

The Association Agreement would be a treaty between the EU and Ukraine that would forma framework for co-operation between them, a clear move towards greater European integration for Kiev.

However, Dhand added that if the aim was to "motivate a policy change in Moscow, it's not going to work.

For Russia, negatives seem to outweigh positives of aninvasion

Sasha Mordovets | Getty Images

"Russian to ensure that Ukraine does not join NATO, to slow down integration with the European Union and to secure some sort of control over the transport of gas to the European Union's borders," she continued.

"They believe that the best way to achieve these points is to have long-term leverage over decision making in Kiev and right now they believe that the best way to ensure the long-term leverage is to federalize the country and essentially weaken the center in Kiev."

Responding to the latest developments, Marc Faber, the editor and publisher of The Gloom, Boom and DoomReport, told CNBC he had "great sympathy" for Putin, arguing that the Russian President was simply responding to the Western powers' encirclement of Russia and also China.

"There is a point that arises when these countries say: 'We have had enough. This is our territory, this is our sphere of interest,'" he said. "Crimea is of prime strategic importance for Russia. I suppose if a foreign power went and created trouble in Guam, the U.S. would also respond. That's what the Russians have done. They don't want Ukraine to be part of NATO because NATO is basically a method to encircle Russia further."