Tuesday, October 7, 2014

Global Impact: Despite Putin's Saber-Rattling, Finance Ministers Prepare for Economic Impact

According to AFPRussia's already battered economy will struggle to recover from the fallout of the crisis in Ukraine as uncertainty looks set to drag down growth around the former Soviet Union, the IMF warned on Tuesday.

"Risks to growth are largely to the downside," the international lender wrote in its World Economic Outlook released on Tuesday (October 7).

"An escalation in geo-political tensions between Russia and Ukraine, resulting in a tightening of sanctions against Russia, could entail a serious setback for the region.

"Russia's economy has been hit hard by the spillover from the Ukraine crisis, with the IMF's projected growth rate for 2014 slumping to just 0.2%.

The global lender has halved its 2015 growth forecast for Russia to 0.5% amid fears that Moscow's standoff with the West over Ukraine will continue to take its toll.

The US and EU have slapped the toughest sanctions on Moscow since the Cold War over its support for a separatist uprising in east Ukraine, prompting Moscow to retaliate with embargoes on a wide range of food products from the West.

Massive capital flight from the country is expected to reach some $100 billion in 2014 and to remain high over the next year, the IMF has estimated.

The turmoil has seen the ruble lose a fifth of its value against the dollar since the start of the year, with the national currency on Monday (October 6) briefly plummeting through the psychologically important mark of 40 to the dollar to reach an all-time low.

Meanwhile inflation has soared to over 8% and looks set to remain elevated in 2015.

COMMENT: "Even without further escalation, prolonged uncertainty could erode confidence, accelerate capital outflows, put pressure on the exchange rate, and further weaken investment and growth, with the adverse spillovers to the rest of the CIS via lower imports, remittances, and foreign direct investment," the IMF said.

Some senior Russian officials have sounded increasingly dire warnings over the country's perilous economic situation, yet President Vladimir Putin has shown little sign of relenting over Ukraine in a bid to ease the economic woe.

Economy Minister Alexei Ulyukayev last week warned that the combination of high inflation and near-zero growth created an "explosive situation."

The head of Russia's largest bank, Sberbank, Herman Gref, himself a former economy minister, warned that Russia could end up collapsing like the Soviet Union.

Many analysts say that Putin appears willing to withstand any economic pressure in his bid to stand up to the West and secure control over Ukraine's industrial heartland in the east.

"All signals from President Putin are that the Russian government is prepared to weather whatever economic storms are necessary in pursuit of its broader objectives in Ukraine," the Eurasia Group wrote last week.

Around the region the economic outlook remained very grim. In Ukraine-- already in recession since mid-2012--the fighting in the east has led the IMF to forecast the economy will shrink by 6.5% percent this year and only recover 1% in 2015.

The Ukrainian hryvnia has lost some 40% of its value against the dollar since the start of the year as inflation has soared.

Neighboring economies reliant on trade with Moscow will also be hit by fallout from the crisis.

Lower demand from Russia will see pro-Moscow Belarus endure "subdued" growth and Western-leaning Moldova will struggle to bolster its economy, the IMF said.

The knock-on effect will also be felt in former Soviet nations such as Armenia, Kyrgyzstan and Tajikistan where remittances from Russia make up a significant % of the economy.

The oil-rich Central Asian nation of Kazakhstan will also see growth decline as investor confidence remains unsteady on the back of ongoing regional tensions.

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