Russian economy to shrink 3% in 2015: economy minister

02 February 2015

Russia, the world's eighth-largest economy, is likely to contract 3 per cent this year, embracing its first recession since the 2009 global financial crisis on the back of plunging oil revenues and western sanctions due to its involvement in the unrest in Ukraine.

The 3-per cent forecast is actually a conservative figure compared with more upbeat consensus forecasts, the country's economy minister Alexei Ulyukayev told Russian reporters over the weekend.

Many analysts foresee a more dismal picture for the Russian economy, predicting up to 4-5 per cent GDP contraction in 2015. Global credit rating agency Moody's said earlier this month that the country's GDP may shrink as much as 5.5 per cent.

However, the international Monetary Fund (IMF) in its world economic outlook released a fortnight ago has forecast 3-per cent contraction for the Russian economy this year and 1-per cent in 2016.

Ulyukayev expects inflation to reach 12 per cent by the end of 2015, up from 11.4 per cent in 2014.

Capital outflows could hit $115 billion in 2015, up from an earlier estimate of up to $90 billion, after hitting a whopping $151 billion in 2014, which was way beyond all predictions.

Besides, the minister expects capital investment to drop by 13 per cent this year and retail sales by 8 per cent.

Just on Friday in a surprise move, the Russian central bank cut its lending rate to 15 per cent from 17 per cent, to stimulate growth in the sagging economy. (See: Russian central bank cuts main interest rate as recession fears rise).

The move sent the rouble 2.4 per cent lower against the US dollar, leaving the dollar worth 69.47 roubles. The currency has lost about half of its value in the past one year.

The Bank of Russia said its action was aimed at averting sizeable decline in economic activity against the background of negative external factors, apparently referring to the western sanctions and fall in oil prices.

Justifying the central bank's decision to cut interest rates, the minister said that ''it was absolutely justified and practical.''

Last month the central bank raised the interest rate from 8 per cent to 9.5 per cent and further up to 17 per cent to tame the rising inflation. However, now it feels that economic growth is of topmost priority under slumping oil prices.

Oil revenues account for about half of Russia's GDP. Prices of Brent crude has fallen from the highs of $115 a barrel last summer to around $52 a barrel on Friday.

Last week, the country announced a 2.34-trillion ruble ($35-billion) anti-crisis plan to prop up the economy without revealing the details. The government said that it would curtail 10 per cent of its spending plans this year except defence, social spending and debt repayments, aiming to balancing the budget by 2017.

Meanwhile, global credit rating agency Standard & Poor's last week downgraded Russia's sovereign debt rating to ''junk'' status.(See: Russia to trim deficit as S&P junks its credit rating)

Nevertheless, in an interview on Russia's First Channel yesterday Russian central bank chief Elvira Nabiullina said that Russia won't default and any rumours around the topic are just empty talks.

''Well, how can there be a default at such a low level of external debt,'' she asked.

According to the central bank's recent figures, Russia's external debt fell by 18 per cent to around $600 billion in 2014 from $719 billion in the beginning of the year.

Regarding inflation, Nabiullina said that the central bank expects that inflation will peak in the second quarter before sliding down to single digit level in 2016.

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