Bloomberg News

Russia Sanctions Threat Seen Abating Amid Recession Risk

May 29, 2014

Russia is less likely to face further sanctions from the U.S. and the European Union as the government is sending conciliatory signals toward Ukraine, a Bloomberg survey of economists showed.

The U.S. will refrain from escalating punitive measures, according to 66 percent of respondents in a survey of 32 economists, compared with 28 percent last month. The EU will hold off on sanctions according to 84 percent, up from 78 percent in April. The probability of the Russian economy slipping into recession in the next 12 months remained at 50 percent, according to the median forecast in a separate survey.

The world’s largest energy exporter is struggling to ignite growth in its $2 trillion economy after Putin’s annexation of Crimea in March prompted the U.S. and the EU to target 98 people and 20 companies with travel bans and asset freezes. Russia since has started moving its troops back from the Ukrainian border and said it would respect the outcome of its neighbor’s May 25 presidential election.

“As Russia softened its rhetoric against Ukraine and it gave an impression of acceptance for Ukrainian elections we do not think U.S. and the EU will implement any further sanctions,” Michal Burek, an economist at Raiffeisen Polbank in Warsaw, said in e-mailed comments.

Ruble Rebound

The U.S. and the EU had said disrupting the ballot would trigger measures targeting Russia’s economy. The tensions and the threat of further sanctions have sparked capital outflow and hurt the ruble, putting economy on the verge of recession.

The ruble has lost 5.3 percent against the dollar this year, the worst performer among 24 emerging-market currencies Bloomberg tracks after Argentinia’s peso. It’s strengthened 2.8 percent in the past month, the best performance in the group. Capital outflows were $50.6 billion in the first quarter, compared with $59.7 billion in the whole of last year.

Ukrainian billionaire Petro Poroshenko won the May 25 election and said he was determined to dislodge pro-Russian rebels holding large swathes of the country’s easternmost regions. While Russia urged the government in Kiev to halt its military operations, Foreign Minister Sergei Lavrov said the Kremlin was ready for talks with the new Ukrainian leader.

‘Still Combustible’

“Of course, the situation is still combustible,” Wolf-Fabian Hungerland, an economist at Berenberg in Hamburg, said by e-mail. “Various random developments can trigger escalation, again. Most importantly, the clear victory for centrist candidate Poroshenko supports hopes that Russia will shy away from invading its neighbor openly.”

Russia’s gross domestic product will expand 0.7 percent this year, according to the median estimate of 40 economists in a Bloomberg survey, compared with 1 percent estimate in last month’s poll. The median forecast for 2015 was cut to 1.7 percent from previous 2 percent.

To help bolster growth as relations with the U.S. and Europe sour over Ukraine, Putin is turning to China and strengthening its ties with other former Soviet republics.

Russia last week reached a $400 billion agreement to supply natural gas to China through a new pipeline over 30 years. The accord, signed May 21 after a decade of talks, “will provide a 0.6 percent of GDP boost from 2019 thanks to higher exports,” Morgan Stanley said May 23 in a research note.

Putin also signed a treaty with Kazakhstan and Belarus today to create a trading bloc of more than 170 million people, yielding a free flow of goods, capital and workers.

Russia’s economy grew 0.9 percent from a year earlier in the first quarter and will expand 0.5 percent in 2014, the Ministry of Economy predicts. GDP rose 1.3 percent last year.

The median forecast of economists for year-end inflation remained at 6 percent. Consumer prices advanced 7.3 percent from a year earlier in April after a 6.9 percent increase in March.

“Although the slump in economic activity should ease demand-driven price pressure later this year, inflation will remain well above the central bank’s 5 percent target in 2014,” BNP Paribas SA (BNP) economist Michal Dybula said in a report.

To contact the reporters on this story: Andre Tartar in London at atartar@bloomberg.net; Anna Andrianova in Moscow at aandrianova@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Andrew Langley, Agnes Lovasz


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