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Summary

  • Russian recession on the cards.
  • Stagflation before Crimea.
  • Capital outflows to intensify.

Amid the EM economies slowdown, growing geopolitical tensions, expensive Crimea annexation, and looming US/EU sanctions, the future of the Russian economy looks grim.

Any of the above mentioned factors could slash the GDP pace to zero this year, but with the whole bunch of negative variables the word "recession" describes the reality much better than "stagnation."

The average GDP growth during 2010-2012 was about 4.0 percent, which then slid to 1.3% in 2013 - very dangerous level for an emerging economy on the back of high inflation. We must say that the CPI number stayed within 6.1%-7.4% since the beginning of 2012, which is not too high in emerging market world.

However, with the almost 10 percent devaluation of the Russian Ruble, the situation may change dramatically very soon. The Central Bank CPI forecasts were already revised higher from 5.0 to 6.0 percent this year. But the rise of import prices, and still going on depreciation on national currency may support the inflationary pressure. In this case 8%-9% by the year end is not ruled out.

The Bank of Russia chairwoman had already said the word "stagflation" in February, 2014, before the Crimea conflict arose.

Since the referendum, the capital outflow from the country has intensified. The net outflow of capital by private sector was $62.7 bln in 2013.

According to preliminary estimates of Ministry of the Economic Development of the Russian Federation, it will amount to $100 bln this year. And even this number looks too optimistic, as the World Bank forecasts $80 bln in a positive scenario, and $150 bln in the worst case.

Without the support of foreign investors, and with expensive burden in form of Crimea, we may see negative consequences for the real economy. The official GDP forecast was revised lower from 2.5 percent to 0.6 for 2014, and the World Bank suggests that the country may slip to recession with 1.8 contraction of GDP this year. The scenario looks quite real, if the tensions with Ukraine will keep escalating. But the negative developments in Emerging World will mean higher risks of slowing down of the world economy as well.

Living in global world is a serious responsibility, and there are situations when countries should forget about political ambitions in order to prevent a global collapse affecting every person.

Source: Capital 'Russian' To The Exit