Russia warns of zero growth as economic alarm rises

Russia's economy may not grow this year, the finance minister said Tuesday, warning that Ukraine standoff could see Moscow face its toughest times since the start of the global financial crisis. Finance Minister Anton Siluanov said at a government meeting that Russia's economy faced "the most difficult conditions since the 2008 crisis," when Russia went into deep recession, Russian news agencies reported. "GDP (gross domestic product) growth is estimated as rather low, 0.5 percent," he said. "Perhaps it will be around zero." Russia's economy has already seen colossal capital flight since the start of the Ukraine crisis as investors have pulled out their funds. Further Western sanctions -- particularly if they target Russia's energy exports -- could also impact growth at a time when a promised infusion of cash into the Crimean peninsula threatens to be a drag on Moscow's public finances. Russia has seen growth fall over the last years, from 4.3 percent in 2011 to 1.3 percent last year, blamed by experts on its overdependence on energy exports and failure to modernise the economy. The latest predictions follow a series of increasingly gloomy assessments this month. The International Monetary Fund slashed its forecast for Russia's 2014 growth by two-thirds to 1.3 percent due to political uncertainty. Russia's economic development ministry estimated growth of 0.6 percent and capital flight of $100 billion. - 'Unbalanced budget risk' - Siluanov said that capital flight amounted to $63 billion in the first three months of the year, mainly due to geopolitical instability -- a reference to Russia's involvement in the Ukraine crisis and the rising tensions in its Russian-speaking eastern regions. He said that the capital flight was the result of massive conversion of rubles into foreign currencies due to "risks seen by the population and by investors". "Continuing capital flight lowers the opportunities for economic investment and creates risks of an unbalanced budget," he said. "The main reason for capital flight is instability in the way the geopolitical situation develops." A number of Russian government officials have ridiculed Western targeted sanctions phased in by both the United States and the European Union since last month. Some officials are confident that Europe relies too much on Russian energy to take additional measures. President Vladimir Putin's economic aide Andrei Belousov went so far as to say that sanctions will actually mobilise Russia's domestic industry. But Russia's entire budget depends on energy exports, mostly to the West, and even its formidable reserves "can be eroded quickly," said Capital Economics economists in a note Tuesday. "We suspect that Russia is more vulnerable to tougher measures by the West than many seem to believe," it said. - 'Huge unplanned expenses' - Even without wider sanctions, Crimea is already a big burden on Russia's economy, said economist Igor Nikolayev. "There is indirect influence of the Crimean addition -- capital flight, freezing of investment, closing of foreign capital markets, followed by other countries shifting away from energy dependence on Russia," he said. Nikolayev said that even the finance ministry fiscal hawks are being too optimistic with the zero growth prediction. "There won't be a zero," he said. Crimea will lead to "huge unplanned expenses," most of which will focus on grandiose projects like the bridge over the strait of Kerch or social spending that won't boost economic growth down the line, he said. Siluanov cautioned Prime Minister Dmitry Medvedev against overspending on the Crimean peninsula, which was annexed along with port city of Sevastopol last month to the condemnation of Western countries. "We believe it would be impossible to increase budget spending amid considerable geopolitical risks," said Siluanov. Russia has promised significant increases in salaries and pensions to Crimea's residents and the government plans to invest in the peninsula's infrastructure and the tourism industry ahead of the summer. Putin had even ordered the creation of a special ministry for Crimea, headed by a former deputy economy minister. But this investment has to be made "responsibly," Siluanov told Medvedev, adding that some ministries made announcements about Crimean spending "without analysing the real needs of Crimea and Sevastopol." "Such an approach cannot be acceptable," he said.