The World Bank warned Wednesday that Russia’s economy could contract this year if the United States announces another round of sanctions in response to its annexation of Crimea.
The organization said in its annual report that the Russian economy is expected to grow by 1.1 percent in 2014, but only if the tense standoff between Washington and Moscow comes to a close.
If hostilities between the White House and the Kremlin escalate, prompting yet another round of U.S. sanctions, Russia’s economy could decline as much as 1.8 percent. But the U.S. sanctions would have to be more pointed and they would have to target Russia’s main economic interests, the report said.
The sanctions announced last week by President Barack Obama and the European Union are more general and don’t cause serious damage to Russia’s vital economic interests, according to the Associated Press.
The White House and the EU have so far issued travel bans and have frozen the asset of nearly two dozen people believed to be members of Russian President Vladimir Putin’s “inner circle.”
The World Bank in its report added that Russia’s problems go beyond its recent activities in Ukraine and Crimea, noting that Russia’s 2013 growth rate of 1.3 percent was the lowest in nearly 13 years (not counting the downturn in 2009).
The bank said the downturn in 2009 was caused by a lack of structural reforms.
Russia’s longstanding economic deficiencies have in the past gone “masked by a growth model based on large investment projects … fueled by sizeable oil revenues.”
But recent events in Crimea, the report said, “compounded the lingering confidence problem into a confidence crisis and more clearly exposed the economy weakness of this growth model.”
The Kremlin’s standoff with Washington has spooked some of Russia’s investors, prompting what appears to be a $70 billion capital flight in the first three months of 2014, the AP reported.
That amount is more than what left Russia in all of 2013.
For their part, Russian officials said aren’t considered introducing capital controls to stem the outflow of capital. Still, perhaps in anticipation of a longterm fight with the U.S., Russia in February increased its gold holdings from 7.24 tonnes to 1,072 tonnes. Putin has also mandated that all Russian business owners register and pay taxes locally and that Russian politicians hold no foreign accounts or equity.
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