Friday, March 29

Russia heading for worst recession since end of cold war, says UK | Russia


Russia is heading for its deepest recession since the aftermath of the collapse of the Soviet Union, the UK government predicted on Friday, as Moscow’s central bank unexpectedly cut its key interest rate to support its shrinking economy.

The Foreign Office said Russia’s GDP is expected to contract by between 8.5% and 15% this year, as the series of sanctions imposed following the war in Ukraine hit activity.

That would be more severe than in 2009, after the financial crisis, when Russia’s economy shrank around 7.8%and would be the worst decline since GDP fell for several years in the early 1990s.

Longer term, expert predictions suggest GDP growth will continue to be depressed as the country is cut off from western technology, the UK added, as it announced sanctions on Vladimir Putin’s two adult daughters.

Western sanctions on Russia mean that about 60%, or £275bn, of its foreign exchange reserves are currently frozen, the UK added. That prevented Moscow making dollar debt repayments this week, putting it closer to defaulting on its debts.

Russian firms have already reported a marked contraction in business activity in March, with output and new orders tumbling and inflationary pressures soaring.

With a steep recession looming, the Bank of Russia has announced a surprise cut to borrowing costs. The Central Bank of the Russian Federation (CBR) will lower its key lending rate from 20% to 17% from Monday, six weeks after doubling interest rates in an emergency attempt to prop up the rouble.

The cut shows the bank is pivoting its focus to support the economy, as the recent recovery in the rouble following the introduction of capital controls eased inflation worries.

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The CBR said inflationary pressures had softened, while financial stability risks had stabilized. It also cited the economic cost of sanctions, saying the external conditions remained challenging, and were “considerably constraining economic activity”.

“Today’s decision reflects a change in the balance of risks of accelerated consumer price growth, decline in economic activity and financial stability risks,” said the CBR, adding that it could lower rates again at future policy meetings.

The rate cut shows the CBR is “confident that the most acute phase of the economic crisis has now passed”, said Liam Peach, emerging Europe economist at Capital Economics, and that a major and destabilizing bank run had been avoided.

Peach predicts further gradual interest rate cuts over the course of this year, as the central bank attempts to bring inflation back to target.

The rouble has recovered from the record lows in the early days of the Ukraine invasion, when it plunged to 135 roubles to the US dollar. It has now risen back to around 80 roubles to the dollar, helped by restrictions on moving money abroad and a ban on foreign currency sales.

February’s interest rate rise also encouraged Russians to save their roubles, supporting the currency.

The surge in commodity prices since the war began has also helped Russia’s finances, with Europe continuing to buy oil and gas to meet its energy needs.

But the freeze on Russia’s foreign exchange reserves means Moscow is moving closer to its first debt default since 1998. Earlier this week, the US blocked attempts to pay more than $600m (£461m) owed to Russian bond investors, leading Moscow to make payments in oaks instead. That could be classed as a default, once a 30-day grace period expires.

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Several economists have forecast Russia could suffer a double-digit contraction this year. The Institute of International Finance predicted last month that Russia’s economy would shrink 15%, with the recession wiping out 15 years of economic gains by the end of 2023. Further energy boycotts would drastically impair Russia’s ability to import goods and services, deepening the recession, it warned.

The London Platinum and Palladium Market announced on Friday it was suspending two Russian government-owned precious metals refineries from its good delivery lists with immediate effect.

The decision bars the two refiners from selling platinum and palladium into the London market, the world’s largest. The palladium price jumped 8% after the move, on concerns of supply disruption to the precious metal used in catalytic converters.


www.theguardian.com

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