Tags: Russia | economy | Crimea | Ukraine

Russia's Economy May Stall on Capital Flight, Siluanov Says

Tuesday, 15 April 2014 10:14 AM

Russia’s economic growth may grind to a halt this year as capital flight accelerates in the wake of its annexation of Crimea last month, Finance Minister Anton Siluanov said.

Gross domestic product may expand less than 0.5 percent and may fail to grow at all in 2014, Siluanov said today in a speech in Moscow. The slowdown is occurring as “geopolitical uncertainty” drives capital outflows and the price of crude oil, the country’s main export earner, may fall, he said.

U.S. and European Union-mandated sanctions triggered by Russian President Vladimir Putin’s annexation of Crimea from Ukraine last month threaten to tip the $2 trillion economy into recession after sagging investment last year slowed growth to a four-year low of 1.3 percent. With the risk of falling oil prices, the government’s scope for stimulus spending is limited, according to Siluanov.

“Capital outflows reduce the possibility for investment growth in the economy and creates risks of an unbalanced budget,” Siluanov said. “We consider it impossible to increase budget spending in the condition of considerable geopolitical risks. One-time injections of budget funds aren’t enough to lead the economy to a path of sustainable growth.”

Deepening Sanctions

The U.S. and EU are discussing deepening sanctions against Russia, which they blame for stoking unrest in eastern Ukraine. Russia, which NATO says has 40,000 troops massed on Ukraine’s border, denies involvement and says the Kiev-based government isn’t protecting Russian-speaking citizens

Russia will dip into its sovereign wealth funds next year to finance Crimea, suspending its budget rule for the Black Sea peninsula, according to four people with knowledge of government discussions. Funding for the region, home to Russia’s Black Sea Fleet, will be at least 130 billion rubles ($3.6 billion) next year, another of the people said. All four asked not to be identified as planning is confidential.

Under the rule, spending is based on estimated income, excluding extra revenue from oil and gas sales, with a deficit of no more than 1 percent of gross domestic product. The extra oil and gas revenue is channeled to the Reserve Fund, one of Russia’s two sovereign funds, until it reaches 7 percent of gross domestic product.

The Finance Ministry has fought to keep the budget rule unchanged as possible modifications are being considered.

“The situation is clearly bad,” Vladimir Osakovskiy, the Moscow-based chief economist for Russia and the Commonwealth of Independent States at Bank of America Corp., said by phone. “Siluanov is trying to protect the budget goal and to highlight potential risks of uncontrolled budget spending increases.”

Economic conditions continue to worsen, partly as “external forces” are trying to push the country toward an “artificial crisis,” Prime Minister Dmitry Medvedev said in Moscow earlier today. First-quarter economic growth slowed to 1 percent from a year earlier, compared with 2 percent in the October-December period.

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Russia's economic growth may grind to a halt this year as capital flight accelerates in the wake of its annexation of Crimea last month, Finance Minister Anton Siluanov said.
Russia, economy, Crimea, Ukraine
Tuesday, 15 April 2014 10:14 AM
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