July 25--Russia's fragile economy will all but grind to a halt this year as the crisis in Ukraine takes its toll, a leading global watchdog warned last night.
The International Monetary Fund said the Russian economy would grow by just 0.2pc this year, down from 3.4pc in 2012 and 1.3pc in 2013.
This time last year the Washington-based fund was forecasting 3.3pc for 2014 – more than 16 times what it now expects.
It also slashed its forecast for next year to just 1pc as investors and businesses, from Russia and overseas, pull their money out of the country.
IMF chief economist Olivier Blanchard said the downgrades reflected 'a deterioration in business confidence which has been aggravated by geopolitical tensions'.
He added: 'The result has led to large capital outflows and a near freeze in investment decisions.'
In an update to its World Economic Outlook, the IMF said investment in Russia 'is expected to remain weaker for longer, given geopolitical tensions'.
Goldman Sachs is predicting that capital outflows will reach more than pounds sterling 75bn this year – describing the flow of money abroad as 'the Achilles' heel of the Russian economy'.
But Russia isn't the only economy facing a bump in the road. The latest monthly Global Forecasting Service, published yesterday by the Economist Intelligence Unit, warns that ongoing political risks mean 2014 will no longer be the 'transformative year for global growth' it was expecting.
The global ramifications will not be lost on European leaders, as weigh up whether to slap Russia with harsher sanctions,
Most nations in the European Union have a trade deficit with Russia, importing more than they export, largely because Russia is such a large exporter of oil and gas. No matter how many British luxury cars, French helicopter carriers or Italian handbags are sent to Moscow, the value of the gas and oil it sends back is higher.
Many countries will put their energy supplies at risk if they decide to break off trade ties. In the case of Germany, some 42pc of its gas imports come from Russia. If that were to be cut off, it would have to buy gas elsewhere and be forced to pay more, hitting consumers in the pocket.
But analysts at Capital Economics say Europe's dependence on Russian energy is being exaggerated. Even in Germany, gas accounts for only 20pc of the power used, with other fuels making up the difference.
Britain imports no gas from Russia at present, but British Gas owner Centrica has a contract in place to start buying gas from Gazprom from October.
But UK businesses still have plenty to lose from deteriorating relations with the Kremlin.
BP owns nearly 20pc of Russian energy giant Rosneft, worth about pounds sterling 8bn. Its dividend from Rosneft is already under threat, with US sanctions on access to debt markets likely to limit what the Russian firm can pay out.
That will eventually filter through to the value of savings investments held by millions of pensioners.
Luxury goods firms across Europe, from Burberry to Bugatti, are making a killing from the bulging wallets of Russia's oligarchs and could feel the pinch if a severe trade embargo were imposed.
Jaguar Land Rover reported a 43pc surge in sales in Russia last year, selling some 20,549 cars, while Rolls-Royce Motor Cars has named Russia as its third largest export market.
Estate agents and bankers in London are also eyeing the situation, given that nearly 1 in 10 properties sold for over pounds sterling 1m in the capital last year was bought with Russian cash.
Perhaps the biggest threat is the mood on financial markets, with any escalation of global diplomatic tension likely to weigh on stock market performance and consumer confidence.
But despite fears about the impact on Europe, Russia has little to gain from a full-blown trade war, according to Julian Jessop, chief global economist at Capital Economics.
'The biggest loser from all of this in economic terms will surely be Russia herself,' he said.
He points out that economic growth would be severely curtailed if Western investors decide to pull out their money and expertise.
The threat of a new Cold War is bringing a chill to financial markets, who fear we are hurtling towards a lose-lose situation.
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