Russia’s economic recovery will take longer than previously forecast, and an early end of sanctions would provide only a “limited and short-lived” boost to growth, according to the World Bank.
“Due to a continually adverse external environment, Russia’s journey to recovery will be long and difficult,” the Washington-based lender said in a report on Wednesday. “The removal of economic sanctions is projected to boost investment, though this will have a relatively modest impact during the forecast horizon due to Russia’s limited growth potential.”
The economy of the world’s largest energy exporter will shrink 1.9 percent this year with oil prices averaging $37 a barrel, according to the lender’s baseline scenario, which assumes sanctions staying until 2018. In December, it forecast a contraction of 0.7 percent for 2016. If the European Union and the U.S. roll back penalties earlier, gross domestic product will probably increase 2 percent in 2017, compared with the baseline forecast for 1.1 percent growth.
Russia is combating a second year of recession, the longest in two decades, after oil prices slumped and U.S. and EU sanctions over the Ukrainian crisis limited access to international capital markets. A currency collapse and accelerated inflation have chocked domestic demand, while partially shielding the budget from a decline in energy prices. The oil and gas industry contribute about 40 percent of state revenue.
The removal of economic penalties would increase investment and boost consumer confidence and demand, according to the World Bank. Still, it says the benefits would wear off after next year, with growth predicted at 1.7 percent in 2018 if sanctions are lifted early. That compares with 1.8 percent under the baseline scenario, according to the report. GDP contracted 3.7 percent in 2015.
The stranglehold of economic penalties is unlikely to ease up soon. Only 13 percent of analysts surveyed by Bloomberg expect the U.S. to relax its sanctions in the next 12 months, while 57 percent predict the EU will begin to loosen its restrictions.
The government has blamed sanctions, lower commodity prices and the standoff over Ukraine for helping push the economy into its first recession since 2009. Geopolitical tensions have also added to the ruble’s weakness. The Russian currency has lost more than 7 percent against the dollar in the past six months, the third-worst performer among its more than 24 emerging-market peers tracked by Bloomberg.
Russian officials have put the annual cost of sanctions at 25 billion euros ($28 billion) in 2014 and 2015. The International Monetary Fund has estimated that the penalties may initially cut real GDP by 1 percent to 1.5 percent. Prolonged curbs may result in a cumulative loss of as much as 9 percent of economic output in the medium term, the IMF said in a staff report last August.