How the Russian economy has deteriorated | Economy
Russia’s economy was struggling even before the crisis in Ukraine, but things have now worsened, according to the International Monetary Fund. GDP declined in the first three months of 2014 and will decline again in the second quarter. According to the technical definition, this would amount to a recession.
The news will come as no surprise to the European Bank for Reconstruction and Development, which counts Russia as its biggest customer. The EBRD estimates that there will be little or no growth this year, even assuming that there is no further escalation of the crisis.
Russia has five big problems. The first is that its manufacturing sector is not competitive after being deprived of investment. The second is that the lack of a thriving industrial base has made the economy even more dependent on its oil and gas sector. The third is that a combination of a struggling economy, the Ukrainian crisis and rampant corruption has led to capital flight. Goldman Sachs has estimated that up to $ 50 billion (£ 30 billion) has left Russia since the start of 2014, and the annual figure could reach $ 130 billion.
The fourth problem is that with the cash leaving the country and little or no investment coming in, the value of the ruble has fallen sharply. This forced the central bank to raise interest rates, which further weakened growth. Finally, there is the threat of sanctions. These have no direct impact, but the threat of tougher measures to come weighs on confidence.
Analysts from Capital Economics estimate that a worsening of the crisis could lead to a contraction of the Russian economy by 5% in 2014.
The IMF and the EBRD hope that the fragility of the Russian economy will make Vladimir Putin beware of escalating tension.