Russia admits sanctions are hurting

Moscow- President Vladimir Putin said on Thursday that Ukraine-related sanctions were hurting Russia while one of his ministers said foreign oil and gas companies that quit the country would not be able to return soon.

Putin went further than he had before in acknowledging the impact on the economy of US and European sanctions imposed over Russia's annexation of Ukraine's Crimea peninsula, although he said the damage was not very serious.

"Overall they are causing (damage), because (credit) ratings are being reviewed, loans could become more expensive and so forth. But this is of no critical character," he said in a televised meeting with regional media in St Petersburg.

The United States and the European Union have imposed visa bans and asset freezes on a few Russian individuals but have warned that harsher sanctions, affecting key sectors of the economy could be imposed in days unless Russia implements an agreement intended to defuse the Ukraine crisis.

Condemning sanctions

Putin condemned the use of sanctions as a tool of foreign policy, saying they hurt everyone involved.

However, he warned of consequences for Ukraine if Kiev used force in eastern Ukraine.

Earlier, Natural Resources Minister Sergei Donskoy said foreign firms that withdrew from Russia, the world's top crude oil producer, would pay a price.

"It is obvious that they won't return in the near future if they sever investment agreements with us, I mean there are consequences as well," he told reporters in the city of Birobidzhan in Russia's Far East.

"Russia is one of the most promising countries in terms of hydrocarbons production. If some contracts are severed here, then, colleagues, you loose a serious lump of your future pie."

Russia's economy is highly dependent on oil and gas and the industry, in turn, depends on foreign investment and technology.

Moving money out

Capital outflows from Russia have surged as international tensions have worsened and investors have moved their money out.

Central bank data released earlier this month showed an estimated $63.7bn in net capital outflows in the first three months of the year, the same as for the whole of 2013. The World Bank has said this year's total could reach $150bn.

The surge coincides with slides in investment and in business confidence as forecasters cut growth forecasts.

The economy shrank by 0.5% in the first quarter of 2014, compared with the previous three months, though it grew 0.8% year-on-year, the economy minister said this month.

The rouble is down about 8% against the dollar this year.

The central bank meets on Friday but is unlikely to offer any immediate help to the economy.

It unexpectedly raised interest rates by 150 basis points to 7% in early March following sharp falls in Russian assets over Ukraine tensions. However, Governor Elvira Nabiullina has said the bank does not plan to cut its key lending rate until its June meeting at the earliest.

Sticking with Russia

Donskoy said foreign firms had not yet signalled they would quit Russia and that Western oil majors BP and Royal Dutch Shell were sticking with their projects.

BP owns a 19.75% stake in Kremlin-controlled energy giant Rosneft. It accounts for about a third of BP's oil output and has lost about $1bn in value since early March.

Chief executive Bob Dudley visited Moscow earlier this month and said the company was "rock solid" with its Rosneft investment and that it was "business as usual".

A few days later, Shell chief executive Ben van Beurden also came to Moscow and told Putin the company was committed to expansion in Russia.

Shell already has an oil-producing project with Gazprom Neft, Gazprom's oil arm, and has started to tap hard-to-recover oil in Russia. He confirmed that Shell had agreed with Gazprom to expand the Sakhalin-2 liquefied natural gas plant which produces 10 million tonnes of LNG per year.

Russia has signed deals with other international majors including ExxonMobil, Eni and Statoil, mainly relating to projects in the Arctic.

Gazprom, with more than 15% of global gas production and reserves, is expected to sign a deal next month to begin exporting gas to China from 2018.

Such a deal would mark the end of a decade of talks and some analysts say the pace has picked up partly in response to concerns that the threat of sanctions is spurring Europe to reduce its dependence on Russian energy.