Russia’s economy faces the loss of as much as 9% of the inflation-adjusted value of the goods and services it produces if Western sanctions and Moscow’s retaliatory measures remain in place in the medium term, the International Monetary Fund said on Monday.
The West imposed the sanctions last year in response to Moscow’s annexation of Crimea and its support of rebels in eastern Ukraine. The IMF said their impact on Russia’s oil-dependent economy suggests a recovery could be slower than the Kremlin’s forecast.
This year, the U.S. and European Union extended sanctions against Moscow, restricting access to global capital markets for Russian banks and companies. In response, Moscow prolonged its ban on food imports from states that sanctioned Russia.
“The external shocks, added to pre-existing structural weaknesses, are certainly weighing on Russia’s growth prospects,” Ernesto Ramirez Rigo, IMF mission chief for Russia, said in a report.
The IMF kept its 2015 economic outlook unchanged from May, expecting the economy to contract 3.4% this year before returning to growth in 2016. This is slightly more pessimistic than the government’s forecast that gross domestic product would shrink by as much as 3% this year and would grow by more than 2% in 2016.
The IMF said Moscow’s financial and economic authorities acted well to handle sanctions and a drop in oil prices, which helped to absorb external shocks. But the IMF warned that further escalation of geopolitical tensions would send the ruble falling, would boost inflation and capital outflows, and further batter domestic demand.
In the longer run, the IMF said it expects Russia’s economy to grow 1.5% a year because of slow progress in implementing structural overhauls. The IMF suggested Russian authorities should work on increasing competition in the economy.
“Strengthening governance and the protection of property rights, as well as cutting regulatory red tape would make a difference, as would better customs administration and reduced trade barriers. These measures could increase competition in domestic markets. Public investment could also be made more transparent and efficient,” the IMF said.