Russian president Vladimir Putin’s misadventure in Crimea could plunge the world’s eighth largest economy into recession this year, analysts warn, undermining growth prospects in Latin America and other emerging markets and causing a capital flight to safe havens such as Germany and the United States.
The World Bank has warned that if tensions escalate further, leading to more uncertainty over economic sanctions, Russia’s economy could shrink in 2014 by up to 1.8%. Inflation is another key challenge. The ministry of economic development tips prices to rise by 7% year-on-year in March, a 0.8 percentage point rise over February figures.
“Russia’s economy was already in a fragile state even before Crimea,” said Liza Ermolenko, an emerging markets economist at Capital Economics in London. “With growth slowing and inflation rising, things are really very bad. Recession is not inevitable — we still retain a base-case scenario of 1% growth – but all these factors make it an increasingly likely outcome.” Ermolenko added that inflation is likely to persist, tipping it to remain at around 7% throughout the year, above the central bank’s official target of 5%.
Russia’s three-term president does appears to recognise the danger to Russia’s fragile economy – if only belatedly. On Saturday, Putin initiated an hour-long phone call with US president Barack Obama, after which Russia’s foreign ministry pledged it had “absolutely” no intention of invading Ukraine. But with Russian troops camped out on the border, many fear escalation over the Crimean conflict will heap economic sanctions on Russian individuals, firms and banks, and further dampen domestic growth.
LATIN CONTAGION
Analysts also warn that Russia’s growing pains could ameliorate listless growth across key emerging markets, including Brazil and Mexico, both struggling to reboot their own, sluggish economies. Others point to fears that Russia’s truculence over Ukraine — which is unlikely to waver ahead of controversial presidential elections scheduled for May 25 — could undermine waning investor faith in emerging markets, already hit hard by US quantitative easing tapering measures. “If the situation in Ukraine worsens, you will see an accelerated flight to safety, as capital flees Latin America and other emerging markets for developed markets,” said Ermolenko.
Deputy economy minister Andrei Klepach said this week that Russian GDP grew just 0.3% year-on-year in February, up from 0.1% in January. Klepach warned that the nation’s economic performance was “deteriorating further” as international tensions surrounding Ukraine forced capital to flee Russia.
Nor is Putin’s endgame clear, or whether he can successfully extricate himself from the mess in Ukraine without losing face at home. His popularity at home touched 82% on Friday, the highest level since the conflict with Georgia in 2008, proving that he loses few points among Russia’s populace for appearing strong on the world stage.
The big question for investors, said Charles Robertson, chief economist at Moscow-based investment bank Renaissance Capital, was "whether Putin will be incentivised to move into eastern Ukraine. It would be a much more dangerous move to make [than Crimea]. There would be sanctions, and a big economic cost to the population, and things could get very ugly indeed.”