WASHINGTON: The sharp fall in oil prices and Western sanctions could combine to drive a five percent contraction of the Russian economy next year, an economist warned Wednesday.
Lubomir Mitov, a Russian specialist at the Institute of International Finance, said that if oil prices stick at current levels, domestic investment and consumption will plunge, and companies and banks that do not enjoy government support could default on their loans.
If oil prices remain in the range of $58-62 a barrel for a year or more, "Russia will be in a very deep recession, which will definitely be more than a drop in GDP of five percent," he said.
The recession would be sustained through 2016 as well if sanctions applied on the country over its support for Ukraine rebels remain in place.
The sanctions are choking off especially funding and support for investment in oil and gas operations.
If the oil prices stay at current levels for only several months, he said, "it is not really that important" for the overall economy.
"If we have $60 a barrel for a year or two, it is a very, very significant downside for Russia."
Mitov, who studies Russian and eastern European economies for the IIF, an association of 500 of the world's largest banks and financial institutions, said the Russian government has to finance a $100 billion gap in its budget this year due to the plunge in the oil price.
The devaluation of the ruble has helped bridge the deficit, offsetting the fall in energy prices. But the ruble's drop has far overshot what the central bank was likely targeting, he said.
He said the central bank's recent 17 percent interest rate hike to stem the currency's fall came too late, and that companies and businesses continue to pile out of the ruble while supplies of hard currencies have dried up for most.
If the authorities cannot bring calm back to the market, they could be forced to institute capital controls, even though so far the central bank opposes that measure, Mitov said.
The authorities need to "create some sense of normalcy," he said.
"If this doesn't happen, then the exchange rate can go to levels which nobody can really predict."
"Then there will be nothing left for them but to resort to widespread capital controls. This is the immediate danger."
Separately the International Monetary Fund said Wednesday that it was watching the Russian situation closely.
"The IMF is closely monitoring developments in the foreign exchange markets in Russia," a spokeswoman told AFP.
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