Russia faces spectre of recession

Vladimir Putin says Russia is cancelling a planned $57.8 billion pipeline to Europe. Photo / AP

Talk of ‘some panic’ in financial system as oil price and ruble plummet, and lenders get capital injections.

Russia's economic crisis deepened as the Government acknowledged it's heading for recession and a former central banker spoke of "some panic" in the financial system as oil prices plunged.

Speaking a day after President Vladimir Putin said Russia is scrapping a proposed US$45 billion ($57.8 billion) pipeline to Europe, the Government predicted the economy will contract next year and cancelled a bond auction. It was also forced to pledge 39.95 billion rubles ($953 million) to support OAO Gazprombank, at least the third lender to secure a capital injection since US and European Union sanctions curbed their ability to borrow.

The economy is succumbing to penalties imposed over the conflict in Ukraine as the plummeting ruble stokes inflation and a 30 per cent drop in oil prices erodes export revenue. Russia may enter its first recession since 2009 in the first quarter, according to Deputy Economy Minister Alexei Vedev.

"One of the key factors is the lower price of oil," Vedev said yesterday.

Urals, Russia's chief export oil blend, will probably average US$99 a barrel in 2014, a downgrade from an earlier forecast for US$104, he said. Its price is forecast to drop to an average of US$80 next year, according to Vedev. Gross domestic product may shrink 0.8 per cent next year, compared with an earlier estimate of 1.2 per cent growth, Vedev said. The forecasts are still preliminary and don't reflect the Government's unified position, Finance Minister Anton Siluanov told reporters in Moscow.

The revised outlook shows the toll on economic output of Russia's worst confrontation with the US and its allies since the Cold War. GDP will probably shrink or show zero growth this quarter and decline in the next three months on an annual basis, Vedev said. A recession is usually defined as two consecutive quarters of contraction on a quarterly basis.

The Bank of Russia shifted to a free-floating exchange rate ahead of schedule last month after its rules-based interventions drained billions from its currency reserves. Policymakers have also raised their main interest rate four times by a cumulative 400 basis points since March to rein in inflation.

The ruble has weakened almost 30 per cent against the US dollar in the past three months, the worst performer among more than 170 currencies tracked by Bloomberg.

Russia has been targeted by US and EU sanctions, with the penalties curbing access to global capital markets and stoking outflows. Putin denies involvement in the unrest in Ukraine, which began after he annexed the Black Sea peninsula of Crimea in March.

Net capital outflows are set to surge to US$125 billion in 2014, more than the US$100 billion predicted earlier, according to Vedev. That would be the highest annual total since 2008, when US$133.6 billion left the country, according to central bank data.

Inflation will end the year at 9 per cent in 2014 and slow to 7.5 per cent at end-2015, Vedev said. Inflation accelerated to 8.3 per cent in October, the fastest since July 2011.

Retail sales, which were predicted to grow 0.6 per cent next year, may instead plunge 3.8 per cent, according to Vedev. Unemployment may rise to 6.4 per cent in 2015, and real wages will probably shrink 3.9 per cent, he said.

What is putting pressure on Russia's economy?
Plunging oil prices, US and EU sanctions over the Ukraine conflict, inflation and a plummeting ruble.

What will the outcome be?
Inflation is tipped to end the year at 9%, GDP may shrink 0.8% next year, retail sales may plunge 3.8% and unemployment rise to 6.4%.

What happens next?
Russia is scrapping a proposed US$45 billion pipeline to Europe, cancelling a bond auction and has had to pledge 39.95 billion rubles to support OAO Gazprombank.