The Russian government has for the first time acknowledged that the country will fall into recession next year, battered by the combination of Western sanctions and a plunge in the price of its oil exports.
The economic development ministry on Tuesday revised its GDP forecast for 2015 from growth of 1.2% to a drop of 0.8%. Disposable income is expected to decline by 2.8% against the previously expected 0.4% growth.
Russia's economy has been damaged by low oil prices, a key export and the backbone of the state budget, as well as Western sanctions over its role in eastern Ukraine. The sanctions are hurting Russian banks and investment sentiment is down. The national currency, the ruble, has dropped by more than 40% this year, raising concerns of a spike in inflation that can hurt spending.
The release of the forecast on Tuesday afternoon reversed a modest rally in the Russian market, bringing the ruble 2% lower against the U.S. dollar, to 52.30 per dollar.
Russia has a solid balance sheet, extremely low sovereign debt and sizable reserves in foreign currencies, but its dependence on oil leaves it at the mercy of the international market. And its increasing political isolation risks discouraging foreign investment.
The expected rise in inflation will also hurt consumer confidence and business activity, according to one expert.
