* IMF sees 2014 GDP +0.2 pct vs government forecast +0.5 pct
* Nabiullina says growth is unsatisfactory
* Says sanctions have "chilling effect" on investment
* Urges central bank to raise rates to meet inflation target
(Writes through, adds Nabiullina, Spilimbergo comments)
By Lidia Kelly
ST PETERSBURG, Russia, July 1 Sanctions imposed
on Russia over Ukraine have brought growth to a standstill, had
a "chilling effect" on investment and could force Moscow into
economic isolation, the International Monetary Fund said on
The international lender's report chimed with words from
Russia's central bank governor, Elvira Nabiullina, who told a
banking conference that growth was not only unsatisfactory but
was putting the country in a difficult situation.
Russia has been hit by sanctions from the United States and
European Union, prompting investors to pull out of a country
where leaders have used the punitive measures to call for a more
self-sufficient, or patriotic, course for the economy.
With the Fund keeping its growth forecast at 0.2 percent
this year, and the Russian central bank's at 0.4 percent, both
undercut the Economy Ministry's hopes that its 0.5 percent
estimate would be beaten this year and come in closer to 1
"Even without the escalation (of the Ukrainian crisis),
prolonged uncertainty and the resulting deterioration of
confidence could lead to lower consumption, weaker investment,
and greater exchange rate pressure and capital outflows than
assumed under the baseline," the IMF said in a report.
"Moreover, this risks derailing the reform agenda and a
shift toward more emphasis on economic self-reliance rather than
integration with the rest of the world."
President Vladimir Putin has called for business leaders to
repatriate their assets and reduce their dependence on Western
financial markets after Russian officials, many of them his
close allies, were targeted by the sanctions which included
asset freezes and visa bans.
But measures to try to protect the economy failed to stop
Russia losing $80 billion in capital flight in the first five
months of the year, the rouble losing 10 percent of its value
against the dollar and inflation spiking.
The governor of Russia's central bank, Elvira Nabiullina,
said economic growth was too low, causing concerns about
investing in Russia.
"The rouble's long-term stability is possible only by
lowering the outflow of capital," Nabiullina told a central bank
conference in St Petersburg.
Some Russian officials have played down the impact of
sanctions on the economy, but the IMF said the "chilling effect"
would hurt an economy at a crossroads when it might dump
attempts to diversify away from its oil dependence.
"This comes at a crucial moment when the old growth model
based on energy and use of spare capacity has been exhausted and
moving to a new growth model based on diversification requires
new investment, including foreign technology," the IMF said.
Antonio Spilimbergo, the IMF's mission chief to Russia,
underlined the message to journalists on the sidelines of the St
Petersburg conference, saying Moscow should not retreat.
"It's very important to be more integrated with the rest of
the world, both financially and economically," he said. "Now,
the recent events are problematic ... because it would be a big
pity if this takes a toll on investment in the longer term."
Firms are not spending on tangible assets, such as building
and infrastructure, and capital expenditure has been falling
month after month, down 2.6 in April.
Instead, money is flowing out of the country. The IMF
estimates that capital outflows could reach $100 billion this
year, in line with the Russian government's estimates.
The Fund said fiscal budget reserves, of around 0.3 percent
of GDP last year, would cushion the overall budget balance from
Crimea-related spending on infrastructure.
The Russian government revised down its budget surplus
forecast on Tuesday to 0.4 percent.
"Under the baseline scenario, general government debt is
expected to remain sustainable and low," the IMF said.
Russia's sovereign debt to GDP ratio stood at around 12
percent last year, while many developed countries, such as Italy
or Japan, carry a burden of 100 percent or more.
The IMF urged the finance ministry, however, to remain
prudent in spending and when assuming the base oil price for
The energy sector accounts for one-fifth of Russia's gross
domestic product, two-thirds of exports and around one-third of
general government revenues.
"Additional fiscal measures, if needed, should be temporary
and of high quality and be set in a medium-term framework that
ensures sustainability," the IMF said. "But additional fiscal
consolidation in outer years is needed to rebuild buffers."
The finance ministry manages two sovereign funds, the
Reserve Fund and the National Wealth Fund, which stand at $87
billion each. The Reserve Fund, which is to cover budget
shortcomings, is meant to reach ultimately 7 percent of GDP.
Last year, it stood at 4.3 percent.
"With the Reserve Fund below its target, the authorities
risk pro-cyclical fiscal adjustments in the event of large and
lasting oil price decline," the IMF said.
"This risk is heightened given the already high level of oil
prices. Staff argued for more prudent oil-price assumption
during the budget process to generate more savings."
The IMF says the central bank should raise rates to try to
curb inflation, which it expects at 6.5 percent by the end of
the year, above the central bank's estimate of around 6 percent.
The central bank's general target is 4.5 percent.
"Higher rates would also help reduce capital outflows that
have emerged amid geopolitical tensions, global liquidity
tightening and rate hikes by major emerging markets' central
banks," it added.
(additional reporting by Oksana Kobzeva, writing by Lidia Kelly
and Elizabeth Piper, editing by Ruth Pitchford)