World Bank warns of contraction in Russia

MOSCOW, March 26 Wed Mar 26, 2014 5:15am EDT

MOSCOW, March 26 (Reuters) - Russia's economy could contract by 1.8 percent in gross domestic product (GDP) terms this year if the crisis following Moscow's annexation of Ukraine's Crimea deepens, the World Bank said on Wednesday.

"We assume that political risks will be prominent in the short-term," the bank said in a report on the Russian economy. "If the Russia-Ukraine conflict escalates, uncertainty could rise around sanctions from the West and Russia's response to them."

Yet, the Bank said, its high-risk forecast of a 1.8-percent contraction assumes that the international community would still refrain from trade sanctions.

The Bank also provided a low-risk growth scenario for this year, which assumes a short-lived impact from the crisis, with GDP growth of 1.1 percent. In its last report in December, the bank saw the economy growing by 2.2. percent this year.

A standoff with the United States and the European Union over a political crisis in Ukraine and Moscow's annexation of Crimea have threatened to isolate Russia after the West imposed sanctions against Russian individuals.

The Russian markets and the rouble have been shaken, resulting in massive capital outflows, now estimated by the Economy Ministry at up to $70 billion in the first quarter alone compared with $63 billion in the whole of last year.

The Economy Ministry has yet to revise its early 2014 growth forecast of 2.5 percent for the year, but a deputy minister said on Monday that it was anticipating GDP growth of "around zero" for the first quarter.

The political uncertainties, which have led to high volatility on the markets, could also be a decisive factor in the coming months, the World Bank said.

"An intensification of political tension could lead to heightened uncertainties around economic sanctions and would further depress confidence and investment activities," the World Bank said in its report.

The high-risk scenario is mostly driven by a sharp decline in capital investment and a slowdown in consumption, affected by lower income growth, higher unemployment and plummeting confidence, the Bank said.

It also projected inflation at 5.5 percent for 2014, higher than the upper end of the central bank's targeted range of 4.0-5.0 percent, saying meeting the target would require further tightening.

The Bank sees the rouble remaining volatile, forcing the central bank to intervene in the currency market to keep it from falling too fast. Total interventions in the first quarter may reach $38.9 billion, the Bank estimates.

According to Reuters' calculations, the central bank has spent around $24 billion in March alone on propping up the currency.

In its low-risk scenario, the Bank expects Russia's economic growth to inch up to 1.3 percent next year. The high-risk option envisages 2.1 percent growth, largely due to a low base this year.

"If there is an orderly resolution to the Crimean crisis, the economy would recover in 2015," the Bank said.

"Nevertheless, there would remain some tail risk of continued tensions, which would adversely affect growth over a longer period." (Additional reporting by Vladimir Abramov; Writing by Lidia Kelly; Editing by Maria Kiselyova and Elizabeth Piper)