bne IntelliNews -

Western sanctions and low oil prices caused Russia's economy to shrink by 2% in the first three months of the year, the first time it contracted since 2009, Prime Minister Dmitry Medvedev said in Moscow on April 21 as he presented the government's annual report to parliament.

The country faced "a new reality" after making its "main political decision last year - the return of Crimea to Russia", Medvedev told the State Duma lower house. Export losses from sanctions over the Ukraine crisis amounted to almost $27bn, or 1.5% of GDP, he estimated, warning that the sum could "increase several times" this year.

Meanwhile, adverse oil prices had also hit Russia's economy hard, Medvedev said. The central bank has predicted the economy could shrink by up to 4% this year if the oil price remains around $50 a barrel.

As Russia plots its course out of the troubles, it wants a predictable ruble exchange rate without excessive weakening or strengthening of the currency, according to the head of government: "Our currency is strengthening now, which is not bad for a number of sectors of the economy,” Medvedev said. “But that also lowers our exporting capabilities to some extent, so we are interested in the ruble exchange rate being fully predictable, in avoiding excess weakening as well as over-strengthening of the ruble.”

The government was also working with large companies to ensure they exchange foreign currency on the market according to a "predictable schedule”, the premier added.

Price of Crimea was worth it

The US and EU imposed sanctions on Russia following its annexation of Ukraine's Crimea in March 2014 and amid the ensuing conflict in eastern Ukraine that the West says is being actively fuelled by Russia.

Reunification with Crimea – gifted to Ukraine by Soviet leader Nikita Khrushchev in 1954 – was as important for Russia as the fall of the Berlin Wall was for Germany, Medvedev said, and that despite the resultant world political outcry, there had been “no other way”.

"There are such milestones in the history of each country, which mark the start of a new epoch. For modern Russia it was the year of 2014," he told parliament, and the unprecedented political and economic pressure exerted on Russia after the Crimean events was “the cost of our position”.

"If external pressure intensifies, and oil prices remain at an extremely low level for a long time, we will have to develop in a new economic reality," the prime minister said, but stressed that this would still be manageable: "I am convinced that we will be able to live even in such a reality. The experience of the recent period has shown that we have learnt how to do this."

Medvedev’s address came five days after President Vladimir Putin’s almost four-hour televised question and answer session with the public. While warning against complacency, Putin said Russia had weathered the worst of the economic fallout from sanctions and the oil slump, and that it could expect economic growth to resume in two years.

Data released the same day by the state statistics office showed a worsening of a number of economic indicators in March. Real wages in Russia dropped by 9.3% year-on-year because of rising inflation, while real disposable incomes decreased by a moderate 1.8% y/y. Trade volume slumped by 8.7% y/y in March compared with 7.2% y/y decline in February. The services sector contracted 2% from 1.5% y/y a month earlier. And unemployment climbed to 5.9% from February's 5.8%.

Looking on the bright side

However, the tough economic situation has not impacted too disastrously on Russians’ morale, according to recent - and state-run - opinion polls. On the contrary, the leadership’s resurgent defiant stance towards the West sent Putin’s approval rating to an unprecedented high level.

According to a survey released on April 21 by VTsIOM, Russians are more positive about their country than they have been since state-run pollster began its social sentiment index five years ago.

The index, based on a comparison of respondents' reactions ranging from "everything is terrible" to "everything is excellent"’ reached its high of 70 points regarding attitudes toward their country in March this year, compared with 22 points in early 2010 and 2011.