New sanctions on Russia are 'economic war'

Vladimir Putin Wags Finger

The European Union's (EU) decision to extend sanctions against Russia is akin to "economic war," the head of one of Russia's largest banks told CNBC.

It comes as EU foreign ministers agreed to extend until September travel bans and asset freezes, imposed last year on Russia for incursions into Ukraine territory, which had been due to expire.

"We have quite a strong opinion on sanctions. Sanctions, in other words, are economic war against Russia," Andrey Kostin, chief executive of VTB Bank, told CNBC in Moscow Thursday.

"Economic war will definitely have negative implications for the Russian economy, but more than that it will have very negative implications for political dialogue and security in Europe. And who wants to live in a less secure world?"

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Kostin insisted that sanctions were "the wrong way to treat Russia" and would lead to less stability in Europe.

Russia's economy has been severely impacted not only by sanctions, which have isolated it from international business and trade, but from the falling oil price which has plummeted around 60 percent since June 2014, hurting its exports and revenues. As a consequence, Russia is expected to enter recession in 2015.

Domestically, Russia is suffering from high inflation, seen around 11.4 percent, and a weak currency. In December, the country's central bank hiked interest rates to a massive 17 percent in order to try to defend the ruble and contain inflation.

On Friday, the central bank is due to announce its latest decision on interest rates at a monetary policy meeting, and is expected to keep rates on hold. Finance Minister Anton Siluanov told CNBC Thursday that he hoped rates would be lowered, but that the central bank was independent and could not be influenced.

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Meanwhile, VTB Bank's Kostin insisted that the central bank needed to bring interest rates down quickly.

"I'm not a supporter of high interest rates and I think the central bank should bring it down but I don't think they will, or it will do so very slowly but not drastically," he told CNBC.

High interest rates are creating "a lot of problems" for VTB's borrowers, Kostin said, "and if it stays high for too long I think it will create a lot of problem and we are already expecting negative economic GDP (gross domestic product) growth."

- By CNBC's Holly Ellyatt. Follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld

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