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Sanctions on Russia are 'economic war'

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As the European Union (EU) decides to extend the economic penalties against Russia, the head of one of Russia's largest banks told CNBC that sanctions were akin to "economic war."

EU foreign ministers agreed Thursday to extend until September travel bans and asset freezes, imposed last year on Russia for incursions into Ukraine territory, which had been due to expire.

"We have quite a strong opinion on sanctions. Sanctions, in other words, are economic war against Russia," Andrey Kostin, chief executive of VTB Bank, told CNBC in Moscow Thursday.

"Economic war will definitely have negative implications for the Russian economy, but more than that it will have very negative implications for political dialogue and security in Europe. And who wants to live in a less secure world?"

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Kostin insisted that sanctions were "the wrong way to treat Russia" and would lead to less stability in Europe.

Russia's economy has been severely impacted not only by sanctions, which have isolated it from international business and trade, but from the falling oil price which has plummeted around 60 percent since June 2014, hurting its exports and revenues. As a consequence, Russia is expected to enter recession in 2015.

The country's Finance Minister Anton Siluanov told CNBC Thursday that Russia had always been against "any forms of limitations in capital flows and trade."

"Of course, any sanctions are harmful because they cause the slowdown in the global economy. And the sanctions that have already been imposed against Russia did have negative effect on us," he said.

Siluanov was conservative about their impact, however, saying that Russian companies had adjusted to sanctions and "life still goes on here."

Yuri Kadobnov | AFP | Getty Images

Domestically, Russia is suffering from high inflation, seen around 11.4 percent, and a weak currency. In December, the country's central bank hiked interest rates to a massive 17 percent in order to try to defend the ruble and contain inflation.

On Friday, the central bank cut its key interest to 15 percent, because of a "shift in the balance of risks of accelerated consumer price growth and cooling economy." It said December's hike in rates had "resulted in stabilization of inflation and depreciation expectations to the extent the Bank of Russia expected."

Finance Minister Anton Siluanov told CNBC Thursday that he hoped rates would be lowered and VTB Bank's Kostin insisted that the central bank needed to bring interest rates down quickly.

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"I'm not a supporter of high interest rates and I think the central bank should bring it down but I don't think they will, or it will do so very slowly but not drastically," Kostin told CNBC.

High interest rates were creating "a lot of problems" for VTB's borrowers, Kostin said, "and if it stays high for too long I think it will create a lot of problem and we are already expecting negative economic GDP (gross domestic product) growth."

Russia's economic crisis and capital outflows have prompted concerns about its banking system. The Russian government has given the go-ahead to a recapitalization plan for some of the country's biggest lenders, including VTB, Sberbank and Gazprombank, in order for them to continue to meet lending demands.

Kostin said he believed the country's financial sector could see more consolidation this year among smaller banks but insisted that, overall, the system was healthy.

"We have too many banks and many of them have a weak capital base. I don't think the government and central bank will be supporting all the banks but they will be providing money for healthy banks," he said. "But we don't foresee a problem for the whole sector."

Clarification: This story has been updated to reflect that when Andrey Kostin said sanctions were akin to "economic war" he was not referring to the extended EU sanctions outlined Thursday, but to sanctions in general.

- By CNBC's Holly Ellyatt. Follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld

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