World Bank: Russian GDP to shrink if Crimea crisis worsens

Russia’s economy may contract in 2014 if the conflict with Ukraine escalates, a situation that could prompt Moscow to opt for short-term crisis management instead of much-needed reforms, the World Bank said Wednesday, Wall Street Journal informs. If the conflict escalates, uncertainty could rise around sanctions from the West and Russia’s response to them, leading to further worsening of the consumer and business climate, and resulting in a 1.8 percent drop in gross domestic product, the bank said in its report. The World Bank thus became the first major international institution to say the Russian economy could drop in 2014 because of the Ukraine crisis and annexation of Crimea. The World Bank, which in December predicted that Russia economy would grow, albeit moderately at 2.2 percent, now has a much darker outlook because of the Crimean crisis. “We assume the political risks will be prominent in the short term,” the bank said. However, even if the impact from the Crimean crisis proves to be limited and short-lived, Russian growth would still be anemic at 1.1 percent in 2014 and 1.3 percent in 2015 amid a lack of structural reforms and deteriorating investment and consumer confidence. Both scenarios don’t assume any trade sanctions against Russia from the West. The Russian government had expected the economy to grow 2.5 percent in 2014, but officials have already indicated that the forecast may be revised in April. The bank, which has long urged Russia to tackle structural challenges and resume reforms, now expects the government to abandon the idea altogether.
The bank sees the investor-confidence crisis in Russia’s economy as the main problem, only deepening as a result of the political crisis. “Lack of comprehensive economic reforms hit investors’ confidence,” said Birgit Hansl, the World Bank’s lead Russia economist. She added that high oil revenue and buoyant consumer spending had mitigated investors’ lack of confidence before the crisis. The hope that investment activity would pick up in the second half of 2013 “unfortunately failed to materialize,” she said. “Political risk can be a deciding factor in the short term and may further hurt confidence and raise market volatility,” she said. The ruble is expected to depreciate in 2014 and 2015, as markets will test the Central Bank’s commitment to a flexible exchange rate, Hansl said, but declined to provide the outlook for exchange rates. The World Bank also expects companies to shed workers throughout the year. The rising unemployment and lower consumer confidence will slow down the creation of the middle-class and workforce mobility, which the bank traditionally considers important for sustainable growth. The World Bank sees capital outflow from Russia reaching USD 150 billion in 2014 under the high-risk scenario, and USD 85 billion under the low-risk scenario. Capital outflow for 2015 is forecast at USD 80 billion and USD 45 billion under the two respective scenarios, the World Bank said.

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