IMF predicts sharp contraction as private funds desert Russia

The international monetary fund has issued a new forecast for the Russian economy for this year. It's predicting a sharp contraction, but there's some good news amongst the grim statistics.

The Russian economy will shrink 6.5% in 2009 according to an International Monetary Fund report presented on Monday. That's in sharp contrast to growth of over 5% last year, and despite stimulus measures equal to almost 10% of GDP, according to Paul Thomsen, Head of the IMF's mission in Russia.

“Russia has some strong advantages compared to other emerging markets. The policy of taxing and saving oil revenues means that Russia has the fiscal room and reserves to have a monetary exchange policy that can counter negative shocks from abroad.”

IMF experts say the key to any revival is the banking sector. The Russian government claims a level of bad debt of around 10% is not bad.

The main problem for Russia lies not in bank balance sheets, but according to Clemens Grafe, Economist at UBS in the outflow of capital from Russia.

“The big story there is really returning capital to Russia. The way we think about the crisis, it’s not the oil price or the oil revenue that is missing in the economy, it’s the private sector capital that left when the oil prices fell.”

Russia's stock markets rallied to seven month highs on Monday, as demand from China picked up and oil reached over $67/bbl. UBS is predicting a return to growth in the third quarter.