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International sanctions over Russia's aggressive acts in Ukraine and a lack of structural economic reforms domestically has led the World Bank to cut its estimate of the country's growth in 2015 and declare it at the "threshold of recession."

In its biannual report on Russia issued Sept. 24, the Bank said Russia's gross domestic product would grow by no more than 0.3 percent next year, and could even shrink if the crisis in neighboring Ukraine worsens and triggers further sanctions by the European Union and the United States. The Bank said in 2016, Russia's GDP will rise at most by 0.4 percent.

Russia's own forecast is more optimistic, with a growth estimate of 1.2 percent in 2015 and 2.3 percent in 2016. The World Bank's economist for Russia, Birgit Hansl, addressed that issue in comments to reporters in Washington, where the Bank is headquartered.

"We don't believe that investment growth is picking up as much as the government believes," Hansl said. "Their assumption is that monopolies will be investing."

In fact, according to the report, restrictions on access to Western financing by Russian companies and banks are "likely to have already (negatively) affected investment decisions."

Hansl said the sanctions also are likely to undermine consumer activity, a major economic driver in Russia.

The report concludes that the impact of the sanctions likely will become more apparent in 2015 and "may lead to a period of near [economic] stagnation."

Russia has few options. Even if Western sanctions were repealed fairly soon, the economy would only inch upward by 0.9 percent in 2015, and 1.3 percent in 2016. And in the Bank's view, any increase in geopolitical tensions would actually cause the economy to contract.

"The economy is at the threshold of recession and will remain there for a while," Hansl said.

The Bank found that consumer activity in Russia is already declining. The country's economic growth was near zero from January through June, even as the Kremlin issued rosy near-term economic forecasts.

The Kremlin can maintain macroeconomic stability even with the sanctions in place, the Bank said, but that wouldn't spur growth. And even that stability is threatened unless Moscow maintains a prudent fiscal policy and Russia's central bank follows through on its promise to allow the ruble to find its own value on the world currency market.

The Bank said it doesn't expect substantial economic reforms anytime soon.

If the Kremlin opts for government spending as a stimulus on the economy, it also would fuel inflation and lower the value of the ruble, further harming the country's investment climate. Whatever the Russian government does, the Bank said it expects continued downward pressure on the ruble, which already has lost 16 percent of its value in the past year.

 

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