Russian Economy Is On The Verge Of Recession

The Russian economy is on the verge of recession, which is an effect of Western sanctions regarding the Ukraine conflict as its origin.

A month ago, it had predicted growth of 1.0 percent when the West imposed its first sanctions over Moscow’s support for pro-Russian rebels in eastern Ukraine. But it has now also cut its forceast for 2015.

According to Russia’s statistics office, the economy grew 0.8 percent in the second quarter on a year-over-year basis earlier this month. Seasonally adjusted quarterly data are yet to be released. Zasov added: “We estimate that the situation will improve a bit in the third quarter and we will have a positive development.”

The West imposed its toughest sanctions on Russia last month, including restrictions on access to Western financial markets due to Moscow’s attempts to destabilize Ukraine. In response, Russia imposed sweeping bans on food from the United States, the European Union and a handful of other countries.

The agricultural sector will need nearly $18 billion in additional investment to produce the country’s food. Zasov said “we had hoped that already next year investments would increase significantly, especially in the private sector. But we now have tougher lending conditions in foreign markets, due to the introduction of additional sanctions, which we had not considered before”

Exports are expected to plunge 8 percent this year compared with a previous forecast of 4 percent. Russia enjoyed growth rates of 7 to 8 percent during Putin’s first two terms as president a decade ago, but the economy had already slowed before the crisis.

On Monday, Russia’s economy minister called for relaxing budget rules to finance investment to overcome punitive measures imposed by the West. Some analysts believe the sanctions and the resulting weakening of the Russian economy have been useful in forcing the government to act.

“I think the sanctions play an important role in the growth of the economy,” said Alexei Mukhin, director of the Center for Policy Information & Risk Management. However, others believe the Russian economy is paved with stumbling blocks.

“The recession will not come in like an avalanche, but gradually, and as we know, such things hurt more” said Igor Nikolayev. He predicts it will be worse than the previous crisis, when Russia’s economy shrank by nearly 8.0 percent in 2009.