Russia stares at recession as Ukraine crisis scars economy

Russia looks increasingly likely to sink into recession in 2014 as the knock-on effects of its standoff with the West over Ukraine hurt an economy already beset by structural problems. Data released over the last week showed that Russian is beginning to suffer the effects of the worst East-West political crisis since the Cold War. The threat of economic sanctions from the European Union and the United States has already prompted a massive capital outflow from Russia in the first three months of the year. But even before the crisis erupted, Russian growth was starting to slow due to internal problems, such as slowing consumer spending, sagging investment and weakening demand for its energy exports. Finance Minister Anton Siluanov warned this week that Russia's economy may not expand at all in 2014. His counterpart at the economy ministry, Alexei Ulyukaev, then revealed that the Russian economy contracted around 0.5 percent in the first three months of the year, compared to the fourth quarter of 2013. That makes it increasingly likely that Russia will sink into recession this year, which is defined as two consecutive quarters of shrinking economic output. -'Outlook is bleak'- In an unusually frank public assessment from a Russian minister, Siluanov said Russia was facing the toughest economic conditions since 2009, when it went into a deep slowdown. The uncertainty created by Ukraine crisis has prompted a further spike in Russia's already haemorrhaging net capital outflows, which doubled from a year earlier to $50.6 billion in the first quarter. It also faces long-term structural problems, including a weak private sector in a state-dominated economy, low labour productivity and dangerous dependence on energy exports, which are now cruelly exposed. "The economic situation has become even more strained and internal factors have been exacerbated by a high level of uncertainty on currency and financial markets, serious capital flight, an unreadiness by investors to take decisions in this acute international situation," Ulyukaev said. Capital Economics pointed to weakening growth in industrial production and retail sales in the first quarter, which they said paints an increasingly "bleak" outlook for the country. A slump in the Russian ruble, which plummeted to a record low against the dollar and euro on March 3 after Moscow voted to allow Putin to send troops into Ukraine, could also fuel inflation, they warned. "Russia's economy is not collapsing as some had feared. (But) with the crisis in Ukraine escalating, worse could be yet to come," said Capital Economics. "The resilience of Russia's economy to all of this is often overplayed." Economists at VTB Capital said that first-quarter data showed companies were "holding off capital expenditure" and households sped up purchases of imported goods. "Looking ahead, investments are likely to remain under pressure while consumer resilience is unlikely to be sustained in an environment of slower income growth," they added. -'More sanctions loom'- The biggest fear spooking investors is the prospect of sanctions that would badly hurt the Russian economy if they beyond the asset freezes and visa bans already announced to affect economic cooperation with the West. Russia's entire budget depends on energy exports, mostly to the West, and even its formidable reserves "can be eroded quickly" if Europe stops buying Russian gas, said Capital Economics. Russia has also 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. Some succour may come from the agreement reached by Russia, Ukraine and the West in Geneva late Thursday to de-escalate tensions, but its implementation already seems shaky. Putin also has the consolation that his central bank has one of the biggest stashes of foreign exchange and gold reserves in the world at $473.9 billion. Some companies have also been keen to confirm their ties with Moscow. On Friday, Putin held a well-publicised meeting with the chief executive of energy giant Royal Dutch Shell, Ben van Beurden, in the latest sign Moscow wants to keep its ties with European big business. Echoing a similar statement by the chief executive of Siemens when he met Putin last month, van Beurden assured Putin that his company planned to honour its Russian investments. "We have a long-term vision of cooperation with your country and we want to remain your reliable partner in the long term," said van Beurden. Shell notably works with Russia on the Sakhalin-2 project to supply LNG to Asian markets.