Russia forecasts economic slump as bailed-out bank gets more funds

MOSCOW, (Reuters) – Slumping oil prices have put Russia’s economy on course for a sharp recession and double-digit inflation next year, government ministers said yesterday, as authorities scaled up a bailout for the first bank to succumb to this month’s rouble crisis.

The economy is slowing sharply as Western sanctions over the Ukraine crisis deter foreign investment and spur capital flight, and as a slump in oil prices severely reduces Russia’s export revenues and pummels the rouble.

The government has taken steps to support key banks and address the deepening currency crisis in the past week, including a sharp and unexpected interest rate hike, but analysts are pessimistic on the outlook for both the economy and the rouble.

Finance Minister Anton Siluanov told journalists yesterday the economy could shrink by 4 percent in 2015, its first contraction since 2009, if oil prices averaged their current level of $60 a barrel.

Siluanov also said the country would run a budget deficit of more than 3 percent next year if the oil price did not rise.

“Next year we will, without doubt, have to bring the Reserve Fund into play,” he said, referring to one of Russia’s two rainy-day funds intended to support the economy at times of crisis.

Crude prices have almost halved from their June peak amid a global glut and a decision by producer group OPEC not to cut output. Saudi Arabia said on Friday it was prepared to withstand a prolonged period of low prices.

“We need to have our budget break even at $70 per barrel by 2017,” said Siluanov.

Russia’s government imposed informal capital controls this week, including orders to large state-controlled oil and gas exporters Gazprom and Rosneft to sell some of their dollar revenues to shore up the rouble. Russians have kept a wary eye on the exchange rate since the collapse of the Soviet Union. Hyper-inflation wiped out their savings over several years in the early 1990s and the rouble collapsed again in 1998.

The rouble’s latest fall will inevitably lead to higher inflation next year, which after years of stability threatens President Vladimir Putin’s reputation for ensuring Russia’s prosperity.

“The inflation forecast is tough, high. We forecast the level of 10 percent at the end of the year (2015),” Russian Economy Minister Alexei Ulyukayev said yesterday.

Inflation would remain in double digits throughout 2015, peaking at the end of the first quarter or in the second quarter, he added.

 ROUBLE TROUBLE

The Russian currency slipped yesterday after hitting its strongest levels in more than three weeks earlier in the day.

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