The GDP growth of Russian economy is nearly as disappointing as the Economics Ministry had anticipated. Growth was put at just 0.9% year on year (y/y) in the first quarter of the year, according to Charles Movit, Senior Economist, IHS Economics.
“Much of the unfavourable development in domestic demand took place prior to the heightened tensions with the US and EU over the annexation of Crimea and the alleged outright support for the separatist violence in Eastern Ukraine beginning in early March and stretching toward the scheduled 25 May Ukrainian presidential election,” Movit, said.
“While the initial sets of sanctions against Russian individuals and entities aimed at deterring Russia from this course had little direct impact on Russian business or the Russian economy more broadly, the threat of further sanctions aimed at a number of sectors of the Russian economy and the prospect of retaliation by Russia against US and EU interests dramatically heightened the perception of risk in Russia on the part of both foreign and domestic investors and served to erode business and consumer confidence.
“That impact is reflected in the latest GDP release and likely spells at least another quarter of q/q downturn, qualifying the very soft patch for the Russian economy as a technical recession. Should the Western powers actually move to apply more comprehensive sanctions, whether or not they actually succeed in blocking transactions or freezing the asset of private concerns, this is likely to push Russia into recession for the year. In fact, the IMF has dramatically cut its projection for Russian growth in 2014 to just 0.2% in light of most recent developments.
“We have just posted our quarterly round of detailed forecasts and we have put Russian growth in 2014 at 0.5%, down from 1.0% in our April forecast which at that time was at the higher end of the range of consensus. This forecast assumes that additional sanctions do not come to pass and that the government violates the new fiscal rule and engages in some stimulative spending. Our downside scenario calls for a 1.0% decline in GDP this year.”