IMF: Russia is in recession

The International Monetary Fund said on Wednesday that Russia is already in recession and slashed its growth forecast for 2014 citing the effect of the Ukraine crisis on investment. "If we define recession as negative growth in two quarters in a row, then Russia from that point of view is experiencing recession," IMF economist Antonio Spilimbergo was quoted as saying by the Interfax news agency. The IMF has lowered its 2014 growth forecast for Russia to 0.2 percent from the 1.3-percent figure it issued on April 8, Spilimbergo said. "There is a risk that it could be lowered further," Spilimbergo noted. Russia's economic growth has been falling for the last few years but the Ukraine conflict with its recurrent threat of military action in Europe has seen massive capital flight and the ruble fall to levels not seen since the 2008 global financial crisis. So far the economic strains have not affected President Vladimir Putin's personal popularity, with the independent Levada polling agency on Wednesday putting his approval rating at 82 percent. The IMF's decision came taking into account "the difficult current situation and the significant level of uncertainty related to geopolitical tensions and sanctions," Spilimbergo was quoted as saying in comments translated into Russian. "This all has a very negative effect on the investment climate," he said. "We expect that the fall in investments that already took place in 2013 will increase further this year." In the latest round of sanctions announced this week, the United States and the European Union focused on Putin's close circle and their businesses as well as pro-Russian leaders in eastern Ukraine. The IMF said that the current prediction is based on the scenario that there will be a gradual reduction of tensions in Ukraine, while a continuing conflict could lead to further sanctions and worse economic results. Russia's economy contracted by about 0.5 percent in the first three months of the year compared with the previous quarter. - 'High degree of uncertainty' - The finance ministry warned this month that the economy could tip into recession in the second quarter. Finance Minister Anton Siluanov said this month that Russia could see growth of 0.5 percent in 2014 but warned growth could be only "around zero". Standard and Poor's ratings agency on Friday downgraded Russia's ability to repay debt to BBB-, one notch above junk status, and retained its negative outlook. Russia's economy has already seen colossal capital flight since the start of the Ukraine crisis as investors have pulled out their funds. Spilimbergo said the IMF "expects capital outflows this year at a level of $100 billion," but that a "high degree of uncertainty" remained. Russia's government has predicted capital outflows over 2014 of between $70 and $100 billion. Russia's central bank said that capital flight in the first quarter alone amounted to $50.6 billion. Spilimbergo said the IMF expected to see 1.0-percent growth in Russia in 2015, down from its previous forecast of 2.3 percent. Russia's Central Bank on Friday raised the key interest rate to 7.5 percent from 7.0 percent in a surprise move to combat inflationary pressures. "Possibly this will not be enough," Spilimbergo said. In a scenario in which Russian troops invade Ukraine and remain indefinitely, leading to broader international sanctions, capital outflows in 2014 could reach at least $120 billion and the economy could contract up to 3.0 percent, said Chris Weafer of Macro-Advisory on Wednesday. "There is no historic or comparable event to next stage sanctions and the inevitable counter actions, for an economy of Russia’s size and political importance," Weafer said. Moscow's benchmark MICEX was down 0.44 percent at 1300 GMT on Wednesday, while the RTS bourse was down 0.57 percent. The dollar and the euro gained in value against the ruble ahead of two days of public holidays, with the euro worth 49.48 rubles and the dollar worth 35.71 rubles at 1300 GMT.