* GDP seen falling 1.8 pct in 2014 if crisis escalates
* Low-risk scenario envisages 1.1 pct GDP growth this year
* High-risk scenario puts capital flight at $150 billion
(Adds further comment, background)
By Lidia Kelly
MOSCOW, March 26 The Russian economy may
contract markedly this year and the country could see record
capital outflow of $150 billion if the crisis over Moscow's
annexation of Ukraine's Crimea deepens, the World Bank warned on
In the first estimate by a leading international institution
of the likely economic damage from the Kremlin's standoff with
the West over Ukraine, the bank said Russia's gross domestic
product (GDP) might shrink by 1.8 percent in 2014.
"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
The United States and European Union have called the
takeover of Crimea illegal, and imposed asset freezes and visa
bans on selected Russian and Crimean officials. These moves, and
the threat of harsher sanctions if Moscow goes further by
intervening in eastern Ukraine, have shaken Russian financial
The forecast 1.8 percent contraction represents the World
Bank's high-risk scenario, but still assumes the international
community will refrain from trade sanctions.
In an alternative low-risk scenario, assuming only a
short-lived impact from the Crimean crisis, the bank sees GDP
growth of 1.1 percent this year, compared with the 2.2 percent
it predicted in its last report in December.
"No matter how the Crimean crisis plays out, there is the
risk that the Russian government will be put back into a crisis
mode to uphold macroeconomic stability," the bank said.
"It is likely that policy choices will be about managing
short-term issues, and the medium-term agenda of structural
reforms will continue to take a back seat."
CRISIS OF CONFIDENCE
Russian assets have rebounded this week, calmed for now by
signs that the crisis may ease. But the situation remains
"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.
"Recent events around the Crimea have compounded the
lingering confidence problem into a crisis of confidence," said
Birgit Hansl, the bank's chief economist for Russia. The issue
is "the decisive factor affecting Russia's economic outlook,"
she told a press briefing.
Deteriorating confidence has already led investors to
transfer massive sums outside Russia. The Economy Ministry
estimates net capital outflow at up to $70 billion in the first
quarter alone, compared with $63 billion in the whole of last
In the bleaker of its scenarios, the World Bank envisages
capital outflow at $150 billion this year and $80 billion in
2015. This year's forecast exceeds the $120 billion in capital
flight that Russia saw in 2008 during the global financial
The outflow of money will put further pressure on the
rouble, which despite its recent firming is still 7 percent down
against the dollar this year, according to Reuters calculations.
"We assume the rouble depreciates both in 2014 and 2015 and
we see a high volatility in its exchange rate," Hansl said.
The weakening of the currency is likely to put upward
pressure on inflation, which the World Bank sees at 5.5 percent
in 2014, higher than the upper end of the central bank's
targeted range of 4.0-5.0 percent. Meeting the target would
require further monetary tightening, the Washington-based bank
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.
In its low-risk scenario, the World Bank expects Russia's
economic growth to inch up to 1.3 percent next year. The
high-risk scenario 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
(Additional reporting by Vladimir Abramov; Writing by Lidia
Kelly; Editing by Jason Bush and Mark Trevelyan)