MOSCOW The International Monetary Fund slashed on Wednesday its already modest 2014 growth forecast for Russia, warning that Ukraine-related sanctions were scaring off investors and were pushing the economy towards recession.
The Fund said Russian output would grow just 0.2 percent this year, cutting its estimate from 1.3 percent and earlier 3 percent in its fourth downward revision in a row. It said there were "considerable downside risks" to its forecast.
It forecast capital outflows of $100 billion this year as geopolitical uncertainty took its toll on the investment climate.
"The difficult situation and especially the uncertainty surrounding the geopolitical situation and follow up of sanctions and escalation of sanctions are weighing very negatively on the investment climate," Antonio Spilimbergo, head of the IMF's mission to Moscow, told reporters.
The Ukraine crisis has soured relations between Russia and the West to their worst since the end of the Cold War and has led to sanctions on some Russian individuals and companies.
Russian President Vladimir Putin has acknowledged the sanctions are hurting the economy, but not critically.
Spilimbergo warned that if stepped up, they could take an even greater toll on growth for the oil-dependent economy.
"Continued conflict could lead to additional sanctions and deterioration of confidence that could reduce investment and further growth," adding Russia was already "experiencing recession".
The IMF's gloomy forecast was not far from the economy ministry's own estimate. The $2 trillion economy contracted by 0.5 percent in the first three months of this year and the ministry has said 2014 growth may not exceed 0.5 percent.
The IMF outlook was, however, more pessimistic than that in a Reuters poll of economists published on Wednesday
The 16 economists polled kept their growth forecast unchanged from last month at 0.8 percent but sharply cut their projection for capital investment, a major driver of Russia's economy in the past. They saw, on average, capital investment dropping 2.5 percent this year, compared with last month's estimate of a 1.1 percent full-year decline.
Investment dollars have been hemorrhaging from Russia, firstly because of a retreat from emerging markets earlier this year but with outflows exacerbated by the Ukraine crisis.
Russia's central bank has said capital outflows were $63.7 in the first quarter.
As funds have fled, the ruble has fallen and is down some 10 percent against the dollar this year. In a bid to prevent the weakening currency fuelling inflation, the central bank raised its key interest rate by 50 basis points to 7.5 percent last week, just two months after an emergency 150 bps hike.
Spilimbergo said the rate increase would reduce inflation but was not enough. The IMF saw 2014 inflation above 6 percent, a level the central bank said last week would not be exceeded.
Yet there is little obvious evidence of economic decline on the streets of Moscow.
Restaurants are erecting awnings over summer terraces in preparation for a long holiday weekend beginning on Thursday with the traditional May Day military parade through Red Square.
Economists say consumer demand is still growing, partly because things may get worse later.
Danske Bank analyst Vladimir Miklashevsky in Copenhagen said consumers were bringing forward large purchases as ruble volatility and political risks increased.
"We continue to see Russia's continually tightening monetary policy as a large demand-side shock hitting private consumption and investment by local corporations later this and next year pushing the country to an even deeper recession than we currently expect," he wrote in an emailed contribution to the Reuters poll.
The government has been banking on a recovery in investment later this year. However, in a blow to these hopes, official data show companies' consolidated pre-tax profits fell by nearly a third in the first month of 2014, the highest drop since autumn 2009.
(Reporting by Lidia Kelly, writing by Nigel Stephenson, Editing by Timothy Heritage and Ralph Boulton)