Russia will plunge into recession next year under the weight of lower oil prices and western sanctions over Ukraine, the economy ministry warned.

Gross domestic product is expected to shrink by 0.8%, a sharp reversal from the earlier official forecast of 1.2% growth for the year.

Alexei Vedev, the Russian deputy economy minister, said: “We now assume that sanctions will remain in place throughout the whole of 2015. This for us means closed capital markets for the majority of Russian companies and banks, as well as unfavourable conditions for investment – uncertainty and a lack of security.”

Growth in Russia has already slowed sharply in recent years, falling to 1.3% in 2013 from 3.4% in 2012. Vedev said the economy could grind to a standstill or start shrinking in the fourth quarter of this year, potentially moving into the country’s first recession since 2009 early next year.

Russians are forecast to suffer a 2.8% fall in real incomes next year, as inflation remains higher than previously expected and as the economy slows further. Real incomes were previously predicted to rise by 0.4% next year.

The ministry, which had previously assumed sanctions would be lifted next year, also cut its forecast for the 2015 oil price to an average $80 a barrel, down from $100 a barrel, cutting revenues from Russia’s main exports of oil and gas.

The downgraded forecast sent the rouble down nearly 5% against the dollar to 53.55. The Russian currency has fallen sharply as investors respond to fears of the effect of falling oil prices on the country’s economy. This year it has lost more than 40% against the dollar.

On Monday, the central bank intervened to stem the rouble’s losses following a sell-off on the scale not seen since the Russian debt default of 1998.

The rouble’s weakness has accelerated since Opec decided against cuts to oil production at last week’s meeting, sending oil prices to a five year low of less than $68 at the beginning of this week. Yesterday benchmark Brent crude was down 1% to $71.51 a barrel.

Saudi Arabia said yesterday it would only consider cutting production if other countries - including Russia - agreed to do the same. Speaking in London, Prince Turki al-Faisal, the former head of Saudi intelligence, said: “The Kingdom is not going to give up market share at this time for anybody and allow producers whether in Russia, Nigeria, Iran and other places to sell to Saudi customers because we cut our production.”

Vedev said lower oil prices were weighing on the rouble and the outlook for growth. “The fall in oil prices has caused a significant weakening of the rouble’s exchange rate, which gives rather strong inflationary effect.

“And higher inflationary pressure reduces the purchasing power of the population, which reduces consumption.”

The ministry is expecting inflation to hit 9% by the end of this year, up from a previous estimate of 7.5%.

Despite the weaker outlook for growth in 2015 the ministry nudged up its growth forecast for this year to 0.6% from 0.5%, citing a better-than expected performance from the agricultural sector.

It is also expecting capital flight from Russia to continue amid heightened uncertainty. The ministry increased its forecast for 2014 net capital outflows to $125bn from $100bn, and to $90bn in 2015 from $50bn.”Uncertainty and lack of economic confidence caused by harsher geopolitics have led to a prediction of higher capital flight and lower investment,” the ministry said in a report briefly posted on its website before it was removed.

Neil Shearing, chief emerging markets economist at Capital Economics, said that the drop in Russia’s currency reinforced the research consultancy’s view that the central bank is likely to deliver another big increase in interest rates next week. “We’ve pencilled in a [one percentage point] rise to 10.5%, but wouldn’t be surprised to see a bigger move,” he said.

Shearing added: “History suggests that sharp falls in currencies have a habit of creating strains in the financial sector, and Russia’s banks look particularly vulnerable to a weaker rouble. While there are few signs of immediate stress in the banking sector, this remains the place to look for evidence that a weaker currency is causing problems for the real economy.”

www.theguardian.com/