* IMF cuts 2014 GDP forecast to 1.3 pct from 2 pct
* Urges rouble rate flexibility, combating inflation
By Lidia Kelly
MOSCOW, April 8 The International Monetary Fund
cut its 2014 economic growth forecast for Russia by two-thirds
on Tuesday and warned that downside risks remain on geopolitical
uncertainties after Moscow's takeover of Crimea.
The Fund cut its gross domestic product (GDP) growth
forecast to 1.3 percent from an earlier 2 percent, revising down
its estimates for the third time in a row, from an initial 3
"The balance of risks (for Russia and neighbours) remains to
the downside, considering rising geopolitical uncertainties
following the takeover of the Crimea by Russia, tightening
financial conditions, and volatile capital flows," the Fund said
in a report.
"Intensification of sanctions and countersanctions could
affect trade flows and financial assets."
The IMF forecast follows gloomier estimates from the World
Bank of the likely economic damage from the Kremlin's standoff
with the West over Ukraine. The bank warned the Russian economy
may contract by 1.8 percent if the conflict escalates and grow
by 1.1 percent at best.
The IMF is also more optimistic in its GDP growth estimates
than the Russian Economy Ministry, which said earlier this month
that economic expansion may come "significantly" below 1 percent
if current trends continue.
The United States and European Union have imposed asset
freezes and visa bans on a group of Russians and threatened
economic sanctions if Moscow escalates the crisis further. The
standoff is estimated to result in up to $70 billion in capital
flight from Russia in the first quarter.
The World Bank says capital outflow may come to $150 billion
if the crisis deepens. The IMF has not provided estimates of how
much money could flee Russia this year.
The Fund said Russia's slowdown would have a spillover
effect on former Soviet republics such as Kazakhstan, Armenia or
"A slowdown in Russia owing to unsettled conditions would
affect the Caucasus and Central Asia through both real sector
and financial channels, particularly if energy supply is
disrupted and oil and gas prices rise," the Fund said.
NEED TO ANCHOR INFLATION
Consumer price inflation is likely to average 5.8 percent
during the year, the IMF said, and is likely to remain above 5
percent, the midpoint of Russia's target range, by year-end.
The central bank said last month that inflation is likely to
come at between 5 and 6 percent by year-end, within its 3.5-6.5
percent target range but above the midpoint.
The rouble's weakening was the main reason for the rise in
annual inflation last month to 6.9 percent from 6.2 percent a
"Russia should continue to rely on exchange rate flexibility
to facilitate adjustments while avoiding excessive volatility,
keep monetary policy focused on anchoring inflation, and
maintain a broadly neutral structural fiscal policy," the Fund
The Russian Central Bank was forced in March to raise its
key lending rate by 150 basis points to 7 percent to stem off
capital flight after Russia asserted its right to intervene
militarily in Ukraine.
The bank also introduced temporary changes to its rules that
enable larger forex market interventions. It expended some $25
billion to support the rouble in March, putting on hold plans to
make the rouble more flexible.
Last week, Central Bank Governor Elvira Nabiullina said the
bank did not plan to cut its key lending rate until its June
meeting at the earliest, as inflation concerns remain.
The rouble is down 7 percent against the dollar this year,
after falling 11 percent in March at the peak of the crisis
(Writing by Lidia Kelly, editing by Jason Bush)