MOSCOW: The Russian economy is nearing recession, officials said on Tuesday, with punishing Western sanctions over the Ukraine conflict set to keep growth at ultra-low levels and drive up inflation.

“The economy is close to recession,” said Oleg Zasov, the head of forecasting at the economy ministry, according to Russian news agencies.

The ministry held its forecast at growth of just 0.5 per cent this year, compared with 1.3pc in 2013.

A month ago, it had defiantly predicted growth of 1pc when the West imposed its first sectoral sanctions over Moscow’s support for pro-Russian rebels fighting in eastern Ukraine.

But it has now slashed its forceast for 2015 in half, also to 1pc.

Russia’s statistics office reported earlier this month that the economy grew by 0.8pc in the second quarter on an annual comparison.

Seasonally-adjusted quarterly data has yet to be released, which could show that Russia entered a technical recession as the economy contracted by 0.5pc in the first three months of the year.

Zassov said the seasonally-adjusted second quarter figure was “close to zero”.

However, he added: “We estimate that the situation will improve a bit in the third quarter and we’ll have a positive figure. “The head of the finance ministry’s long-term planning unit said the economy ministry’s annual forecast was too optimistic and that growth this year was likely to be close to zero.

Flagging domestic demand

The West last month imposed its toughest sanctions yet on Russia, including restricting access to Western financial markets, over Moscow’s alleged attempts to destabilise Ukraine.

In response, Russia imposed sweeping bans on food from the United States, the European Union and a handful of other countries.

The borrowing restrictions crimp the ability of Russian banks to lend just as flagging domestic demand has choked off growth and the government wants domestic companies to step up investment to reduce their reliance on the West.

Officials have said that means the farm sector will need nearly $18 billion in additional investment to produce more of the country’s food.

Zassov said the cut in the 2015 outlook was primarily due to reduced investment prospects in the face of continued geopolitical tensions.

“We had hoped that already next year investment would pick up significantly, above all in the private sector,” he said.

Published in Dawn, August 27th, 2014