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Cyprus default may push Russia's economy into recession

March 22, 2013, 11:35 UTC+3
Not Europe, but Russia will be the main loser in the situation
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The Vedomosti has published an article in which it notes that Russia's economy stagnates and default in Cyprus may cause a recession in Russia.

In the past two month of 2013, Russia's economy grew only 0.9 percent (as compared to the same period of 2012), and the growth has almost stopped – 0.1 percent in February, Deputy Minister of Economic Development Andrei Klepach said. The ministry for the present considers the situation as a pause, he said. It is not a recession as in 2008. The pause has lasted since early 2012, notes the Development Centre of the Higher School of Economics. The economy almost stagnates. With weak internal sources of growth, any worsening of the external situation is like a draft for a person who has poor health. The Cypriot crisis may cause a recession in Russia. If Cyprus goes bankrupt, it will be inevitable already this year.

Aside from small direct losses the levy on deposits, freezing of transactions there are indirect ones. If Cyprus fails to find six bln euros, default for securities, 87% of which belong to Cypriot banks, is inevitable. The banking sector will go bankrupt, and it will result in lowering of confidence in the banking system on the whole, explains Valery Mironov of the Development Centre. Credits are actively extended to Russia abroad in 2012 the sector gave a capital inflow of 23.6 bln dlrs (with the outflow of 56.8 bln dlrs from the non-financial sector). The stabilization on world financial markets, the bank capital shortage and the growing demand for credits contributed to this, the centre noted. It is quite possible that the channel will be closed because of the "infection effect", Mironov said. Taking into consideration the fact that the economic growth in 2012 was almost entirely ensured by the growth of consumption, and it included credits, sharp reduction or halt of credits will cause a decline of the Russian GDP already this year, he believes.

Besides, Cyprus is not just a major investor in Russian economy, it is used as a transit country, Mironov's colleague Sergei Pukhov added. Investments coming to Cyprus from Russia are less than those coming from Cyprus to Russia. According to the Russian Statistics Agency (Rosstat), in the whole volume of foreign investments accumulated by Russia, 76.7 bln dlrs (21%) came from Cyprus, and in the whole volume of investments from Russia abroad, Cyprus has 29.6 bln dlrs (25%). If Cyprus loses its status, capitals all the same will continue to flow from Russia to other offshores that have better taxes, protection of ownership rights and bank secrecy, while the inflow may decrease.

Not Europe, but Russia will be the main loser in the situation, believes Dmitry Belousov from the Centre of Macroeconomic Analysis and Short-Term Forecasting. Under crisis conditions, money always flee from developing markets to developed ones, he explains. Going into stagnation is definitely possible, but whether to go into a decline it is a question of understanding what channels it (crisis spread) will go, he said.


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