Oil price plunge drags down Russian economy: EBRD bank

[LONDON] Russia's battered economy will shrink by a far worse-than-expected 4.8 per cent this year, as plunging oil prices add to fallout from the Ukraine crisis, the EBRD development bank forecast on Monday.

The London-based European Bank for Reconstruction and Development (EBRD) sharply revised its September prediction for a 0.2-per cent contraction for the economy of the key oil producer in 2015.

"A sharp fall in the price of oil has piled pressure on an already fragile Russia, and is hitting growth in energy exporters and other emerging nations with close links to eastern Europe's largest economy," the EBRD said in its economic outlook for the bank's investment zone.

Oil prices have slumped by almost 60 per cent since June, hit hard by global oversupply, the strong dollar and weak crude demand arising from the stuttering world economy.

Russia's economy is also buckling under the weight of Western sanctions over the Kremlin's actions in Ukraine - which remains plagued by unrest - and tit-for-tat sanctions imposted on the West in response.

Russia has strongly denied sending weapons and troops into the war zone despite witness claims to the contrary.

At the same time, Russia's economy has been plagued by the tumbling value of its ruble currency, separate data showed Monday.

Net capital outflows from Russia more than doubled in 2014 to US$151.5 billion, prompted by the Ukraine crisis and the plunging value of the ruble, according to statistics from the central bank.

Russia in 2013 had already seen its high level of capital flight, a recurring problem for the country, reach US$61 billion.

The outflow was accelerated by the payment of debts owed abroad by Russian banks and companies, which have had their access to capital markets cut by sanctions.

The EBRD added on Monday that Ukraine's shattered economy is predicted to shrink 5.0 per cent this year, down from September's forecast for a contraction of 3.0 per cent.

That followed a 7.5-per cent collapse in Gross Domestic Product in 2014.

"The Ukrainian economy remains in a particularly precarious state," the London-based institution said.

"In addition to the impact of the conflict in the east of the country, there is currently uncertainty about the volume and timing of international financial assistance."

The EBRD, founded in 1991 to help ex-Soviet bloc countries such as Russia and Ukraine make the transition to free-market economies and democracy, added however that some nations would win a boost from the tumbling cost of crude.

The bank's investment zone - comprising mainly former communist nations across central and eastern Europe but which now includes also Turkey and emerging economies in north Africa and the Middle East - was expected to contract by an overall 0.3 per cent in 2015.

That was a major downgrade from the prior forecast for 1.7-per cent expansion in the operating region that comprises more than 30 countries.

"Even this forecast is subject to considerable risks," cautioned Hans Peter Lankes, the EBRD's acting chief economist.

Those risks included the impact of any further large falls in the oil price, a further escalation in the Ukraine/Russia crisis, and any potential increase in uncertainty in the eurozone, according to Lankes.

Plunging oil prices were however expected to boost countries in central and southeastern Europe and in the south and eastern Mediterranean region, offsetting weak demand arising from eurozone uncertainty, the bank added.

AFP