The Russian government has for the first time acknowledged that the country will fall into recession next year, battered by the combination of Western sanctions and a plunge in the price of its oil exports.
The economic development ministry on Tuesday revised its GDP forecast for 2015 from growth of 1.2 per cent to a drop of 0.8 per cent. Disposable income is expected to decline by 2.8 per cent against the previously expected 0.4 per cent growth.
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Russia's economy has been damaged by low oil prices, a key export and the backbone of the state budget, as well as Western sanctions over its role in eastern Ukraine. The sanctions are hurting Russian banks and investment sentiment is down. The national currency, the ruble, has dropped by more than 40 per cent this year, raising concerns of a spike in inflation that can hurt spending.
The release of the forecast on Tuesday afternoon reversed a modest rally in the Russian market, bringing the ruble 2 per cent lower against the dollar, to 52.30 per dollar.
Russia has a solid balance sheet, extremely low sovereign debt and sizeable reserves in foreign currencies, but its dependence on oil leaves it at the mercy of the international market. And its increasing political isolation risks discouraging foreign investment.
"The real damage from the collapsing ruble and oil price is to investment and growth," said Chris Weafer, senior partner at Moscow-based Macro-Advisory, said in a note to investors.
"Russia is a non-investible country for all but the bravest of hedge fund investors right now, and will remain in this category until both the ruble and oil stabilize at minimum. "
The expected rise in inflation will also hurt consumer confidence and business activity, Weafer said.