Russian economy grinding to a halt as Ukraine crisis takes heavy toll

MOSCOW Mon Mar 24, 2014 3:44pm EDT

An aerial view shows a combine harvesting wheat in a field near the village of Divnoye, some 190 km (118 miles) northeast of Stavropol in southern Russia, July 4, 2013. REUTERS/Eduard Korniyenko

An aerial view shows a combine harvesting wheat in a field near the village of Divnoye, some 190 km (118 miles) northeast of Stavropol in southern Russia, July 4, 2013.

Credit: Reuters/Eduard Korniyenko

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MOSCOW (Reuters) - Russia's economy is barely growing, inflation is rising fast, and capital is pouring out of the country, the Economy Ministry said on Monday, a sign that international tensions around Ukraine are already inflicting severe economic costs.

In February Russia's gross domestic product eked out growth of just 0.3 percent year-on-year, up from a revised 0.1 percent in January, Russia's Deputy Economy Minister Andrei Klepach said.

Last year the economy grew by just 1.3 percent, far below initial forecasts, but there had been hopes that growth would rebound this year. Instead Russia's economic performance is deteriorating further as the international tensions around Ukraine lead capital to flee Russia.

Klepach said that when seasonal and calendar factors are taken into account, February's 0.3 percent was "not bad" and "better than expected."

But he added that "it's too soon to talk about a turn-around in economic trends, about a recovery from stagnation."

He said that the ministry anticipates GDP growth of "around zero" for the first quarter as a whole. That would make its 2.5 percent growth forecast for 2014 challenging.

"There won't be a recession, but there is a problem of stagnation: it's length and depth. Unfortunately the investment slump is continuing. I'm not ready to say how long it will continue," Klepach said.

INFLATION SPIKE

While Russia's economic growth slows, inflation is shooting up. The Economy Ministry expects inflation to reach 6.9-7.0 percent in March, up from 6.2 percent in February.

The sharp rise illustrates how a slumping ruble is feeding into higher import prices, as both Russians and foreigners scramble to get out of ruble investments.

Klepach said that the Economy Ministry forecasts the net capital outflow during the first quarter at $65-70 billion - and "closer to $70 billion".

That compares with an outflow of $62.7 billion during the whole of 2013.

He said that Russia's economic indicators have been deteriorating, even though western sanctions against Russia have so far had only a minor economic impact, because cool relations between Russia and the West damage investor confidence.

"We considered in the forecast how the general deterioration of our relations with developed countries and world markets is having an influence," he said.

"Sanctions so far don't have a significant economic character, but in itself a worsening of relations is a significantly negative factor for economic growth and correspondingly influences the capital outflow."

(Corrects growth figure for January in paragraph 2 to read 0.1 percent, not 0.7 percent)

(Writing by Jason Bush; Editing by Jeremy Gaunt)

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