Russia forecasts recession as oil-price slump takes toll

Slumping oil prices have put Russia’s economy on course for a sharp recession and double-digit inflation next year, government ministers said, 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 fall 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 an unexpected interest rate hike, but analysts are pessimistic on the outlook for both the economy and the rouble.

Finance minister Anton Siluanov said the economy could shrink by 4 per cent in 2015, its first contraction since 2009, if oil prices averaged their current level of $60 a barrel.

He said the country would run a budget deficit of more than 3 per cent next year if the oil price did not rise.

Rainy-day fund

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

The government imposed informal capital controls this week, including orders to 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 currency’s latest fall will 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 per cent at the end of the year [2015]," Russian economy minister Alexei Ulyukayev said.

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

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

Trust Bank

Russian authorities also significantly scaled up rescue funds for Trust Bank, saying they would provide up to $2.4 billion in loans to bail out the mid-sized lender, the first bank to fall victim to the crisis.

The falling rouble has prompted panic buying of foreign currency in Russia and a spike in deposit withdrawals, heaping pressure on a vulnerable banking sector whose access to international capital markets has already been restricted by western sanctions.

Siluanov said authorities would provide additional capital to the country’s second-largest bank, VTB , and fellow state lender Gazprombank.

VTB could receive 250 billion roubles and Gazprombank 70 billion roubles to help fund investment projects, including those planned by Russian Railways, he said.

It was not clear whether this would be in addition to the 1 trillion rouble capital boost the banking sector is set to receive as part of legislation recently approved by parliament. – (Reuters)