Moscow: Russia’s economy contracted about 2 per cent last quarter on an annual basis, Prime Minister Dmitry Medvedev said, blaming the slump on the unprecedented challenges from a plunge in oil prices and sanctions imposed over Ukraine.

The downturn was “most acute” at end-2014 and the start of this year and the situation is now “stabilising,” Medvedev told lawmakers at the lower house of parliament in Moscow on Tuesday. The decline in gross domestic product is the first since a contraction in 2009.

“There should be no illusions,” Medvedev said. “Today we face not only short-term crisis effects: if external pressure increases while oil prices remain at an extremely low level for a long time, we’ll have to develop in a different economic reality, which will test our strength in full.”

The economy of the world’s largest energy exporter is entering a recession after an almost 50 per cent crash in oil prices and the rouble’s worst crisis since 1998. Sanctions enacted by the US and the European Union over the conflict in Ukraine curbed access to international financial markets and stoked capital outflows. Even with a tenuous ceasefire in Ukraine and stabilising oil prices, the central bank predicts that the economy will shrink as much as 4 per cent this year.

The rouble headed for its longest stretch of losses this year as the Russian central bank curbed the supply of cheap dollars to banks after the funds were used to take advantage of the world’s best carry trade. The currency lost 0.4 per cent to 53.5310 versus the dollar by 12:51pm in Moscow. The dollar- denominated RTS Index of equities declined 0.4 per cent.

Economy Adjusts

The economy is gradually adjusting to a floating exchange rate and the budget deficit remains at a safe level, Medvedev said, adding that Russia isn’t facing the “toughest possible scenario.”

Medvedev put the cost of sanctions on the Russian economy at 25 billion euros ($27 billion) in 2014 and said the toll is set to grow multifold this year.

Russia is paying the price for its takeover of Crimea from Ukraine a year ago, Medvedev said. The decision had broad national support and its significance for Russia was comparable to the fall of the Berlin Wall and Germany’s reunification as well as the handover of control over Hong Kong and Macau to China.

“The unprecedented political and economic outside pressure is the price for our position,” Medvedev said. “But everyone — authorities and our society — understood that we had no other way, whatever threats we may face.”