A stock price index graph shows plunging stock prices on an electronic information screen at the headquarters of the Micex-RTS Moscow Exchange, Russia's benchmark stock index. Russia may be entering a recession as uncertainty over sanctions hits markets, foreign investment and domestic demand. (Andrey Rudakov/Bloomberg)
Russia may be heading toward a recession as sanctions imposed by the U.S., European Union and Canada over the country's annexation of Crimea intensify.
According to a report by Russian state-owned bank VTB Capital, the country's economy will shrink over the next two quarters as uncertainty hurts domestic spending, hits markets, and puts a damper on foreign investment.
"Faced with heightened uncertainty, firms are delaying investment and hiring, while households choose to postpone discretionary spending," analysts Vladimir Kolychev and Daria Isakova wrote in the March edition of the bank's Russian Economy Monthly report.
They are lowering their outlook for economic growth in Russia to zero per cent for this year, and say the world's 9th largest economy could shrink further if sanctions worsen or uncertainty remains high.
On Friday, Russian President Vladimir Putin formally annexed Crimea, deepening the divide between his country and the European Union, which has stood behind Ukraine.
Since the crisis in Crimea began, Russian markets have borne some of the pain for Putin's Crimean ambitions.
Russia's Micex stock index has dropped 13.2 per cent so far this year, compared to a 5.7 per cent drop for the MSCI Emerging Market Index, which is a broad measure of market movement in emerging markets around the world.
The ruble has dropped 8.9 per cent so far this year against the U.S. dollar, making it the second-worst performing currency behind the Argentine peso, according to data from Bloomberg.
Rating agency Standard & Poor's last week reduced its outlook to negative from stable, citing "heightened geopolitical risk" and the prospect of further sanctions from the U.S. and EU.
Currently, sanctions imposed by the U.S., European Union and Canada have focused on individuals — but many, including S&P, expect broader sanctions.
Many companies have raised concern that their business interests in Russia could be affected by increased sanctions or a protracted crisis.
Canada's Bombardier says the ongoing crisis could affect the final negotiations of a joint-venture that would see them build Q400 turboprop aircraft in Russia.
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