Russian economy worsening ahead of sanctions

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MOSCOW -- Marketing professor Margarita Zobnina has been watching the Russian economy's gathering woes with mounting alarm: friends who have moved abroad with no plans to return; others who have put off business ventures because of rising uncertainty. Meanwhile, Ms. Zobnina and her husband, Alexander, also a professor, have rented a safe-deposit box to hold foreign cash as a hedge against the declining ruble.

While the annexation of Crimea has rocketed President Vladimir Putin's approval rating to more than 80 percent, it has also contributed to a sobering downturn in Russia's economy that appears to be worsening even before Western sanctions take full effect. With inflation rising, growth stagnating, the ruble and stock market plunging and billions in capital fleeing the country for safety, the economy is teetering on the edge of recession, Russia's economic development minister, Alexei Ulyukayev, acknowledged Wednesday.

Mr. Putin, who just lavished $50 billion on the Sochi Olympics, also must absorb the costs of integrating Crimea, which economists and other experts say has its own sickly economy and expensive infrastructure needs. The economic costs have been masked by recent patriotic fervor but could soon haunt the Kremlin, as prices rise, wages stall and consumer confidence erodes.

Even before the Crimean episode and the West's resulting sanctions, Russia's $2 trillion economy was suffering from stagflation, that toxic mix of stagnant growth and high inflation typically accompanied by a spike in unemployment. In Russia, joblessness remains low only because years of population decline have produced a shrunken, inadequate labor force.

In recent weeks, international and Russian banks have slashed their growth projections for 2014, with the World Bank saying the economy could shrink by 1.8 percent if the West imposes more sanctions over Ukraine. By some accounts, more than $70 billion in capital has fled the country so far this year, and the main stock market index fell by 10 percent in March -- and a dizzying 3 percent just Tuesday, over fears of greater Russian involvement in Ukraine.

"This is our fee of sorts for conducting an independent foreign policy," former Russian Finance Minister Aleksei Kudrin said at a recent Moscow investor conference. He added that the sanctions and fallout from Mr. Putin's foreign policy moves would drain hundreds of billions of dollars from the economy and strangle growth for the rest of the year.

But Mr. Kudrin, who quit his post in a dispute over Kremlin economic policies, said the population had yet to confront the full bill, which he predicted would grow from steep costs of absorbing Crimea, a geographically isolated peninsula.

From a textbook perspective, the deep-rooted ills in Russia's economy have been clear for years: The decadelong skyrocketing in energy prices that buoyed Mr. Putin's popularity has flat-lined, exposing the nation's dangerous over-reliance on oil and natural gas revenues. Efforts to diversify into manufacturing, high tech and other sectors have failed, and officials have been unable, or unwilling, to stop the rampant, corrosive corruption that scares off foreign investors.

Consumer demand, which had been a primary driver of the Russian economy in recent years, stalled in 2013. Surveys by the Levada Center, Russia's only independent polling institute, show that consumer sentiment has been on a slow, steady decline since 2010, while fears of inflation -- especially rising prices for basic necessities, which have persisted since the 1990s -- have grown, along with new anxiety about a potential drop in wages or rising unemployment.


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