Russia's economy is already in recession and is expected to lose at least $100 billion in investment this year, largely due to the "geopolitical uncertainties" created by its conflict with Ukraine, the International Monetary Fund mission chief in Moscow said Wednesday.
As investors flee and Western powers threaten Moscow with increased sanctions for its seizure of Ukrainian territory, the IMF has lowered its growth forecast for Russia this year to 0.2%, down from the 1.3% that had been expected before the Ukraine crisis unfolded.
In a report posted on the fund's website Wednesday after the latest round of consultations with Russian economic leaders, the IMF blamed the declining outlook on both the security situation and the Russian government's failure to adopt structural reforms and cut red tape.
"Fostering competition across sectors and regions, improving governance, and lifting heavy regulations are necessary to attract high-quality investment and boost potential growth," the IMF report stated.
But Antonio Spilimbergo, the IMF economist in charge of Russia, told reporters in Moscow that the darkening outlook for the Russian economy was due to "the difficult current situation and the significant level of uncertainty related to geopolitical tensions and sanctions."
Sanctions imposed on Russia by the United States and the European Union last month targeted only a few dozen oligarchs and officials in Russian President Vladimir Putin's inner circle who are seen as having had an influential role in the invasion and seizure of Crimea this year. Both the U.S. and EU added to the sanctions this week, with Washington including some key Russian financial institutions on its blacklist. The Western nations and Ukraine's embattled interim leaders accuse the Kremlin of fomenting revolt in the heavily Russian-speaking areas of eastern Ukraine, where masked gunmen have occupied key government facilities in at least a dozen towns and cities.
The sanctions have had little direct effect on the economy in the few weeks they have been in place. But the threat of a more damaging toll if Russian meddling in Ukraine's affairs continues has undermined investor confidence and spooked the currency and stock markets.
"This all has a very negative effect on the investment climate," Spilimbergo said of the sanctions and the mounting violence in eastern Ukraine.
The IMF expects capital outflows from Russia this year to be $100 billion, he said, but noted that capital flight could be even worse if the uncertainties inflicted by the Ukraine conflict persist or worsen.
Russia's economy shrank by 0.5% in the first quarter of this year, the IMF said, after a stagnant end to 2013.
"If we define recession as negative growth in two quarters in a row, then Russia from that point of view is experiencing recession," Spilimbergo was quoted as saying by the Interfax news agency.
Russian Finance Minister Anton Siluanov sounded the alarm on the economy two weeks ago when he warned in a meeting with Kremlin officials that the country was at risk of zero growth for 2014. Economic Development Minister Alexei Ulyukayev said at the time that $63 billion had been converted from rubles to hard currencies and taken out of the country in the first quarter of this year.
Putin and much of the rest of his leadership, however, have brushed off sanctions as little more than an annoyance and have shown little inclination to use their influence with Russian separatists in Ukraine to end their armed occupations.
"You can, of course, continue to expand the 'blacklist,' but it will lead absolutely nowhere," Russian Prime Minister Dmitry Medvedev told lawmakers on Tuesday, the day the latest EU sanctions were detailed.
If Moscow's Western trade partners continue to pursue punishment of Russia for the Ukraine crisis over which it claims to have no control, the Russians will be forced to rely on their own resources, Medvedev said. "And we shall win in the end."