Russian President Vladimir Putin
Russian President Vladimir Putin Reuters

The World Bank has warned that Russia's economy will inevitably shrink if it does not start to put an end to the escalating crisis in Ukraine and Crimea.

According to a World Bank report, the Russian economy could contract by 1.8% if the Ukraine crisis does not come to an end soon as economic sanctions, imposed by Western powers, will eat into the country's ability to trade.

"We assume that political risks will be prominent in the short-term," said the World Bank.

"If the Russia-Ukraine conflict escalates, uncertainty could rise around sanctions from the West and Russia's response to them."

Geopolitical tensions are high in the wake of Russia's annexation of Crimea, completed last week, after a referendum described as "illegal" by the West.

In a bid to isolate Russia, the European Union (EU) and the United States subsequently imposed sanctions and travel bans on a number of Russian and Ukrainian individuals with close ties to the Kremlin. They have also placed sanctions on a number of banks, including Bank Rossiya, known to be the personal bank for many senior Russian officials.

Political turmoil has affected the Russian markets and the rouble, resulting in capital flight from the country. The Economy Ministry said that as much as $70bn (£42.3bn, €50.7bn) of capital has left the country in the first quarter alone, more than the total capital outflows for 2013.

The World Bank report also conducted a low-risk growth scenario, which assumed the impact of the crisis and sanctions to be short-term. In this case modest GDP growth of 1.1% was predicted.

The political tensions remain high, although Russia has insisted that it has no intention to invade Eastern Ukraine.

However, with a large build-up of Russian troops along the Ukrainian border, Western leaders remain on alert and have repeatedly urged Moscow to respect Ukraine's territorial integrity.

"An intensification of political tension could lead to heightened uncertainties around economic sanctions and would further depress confidence and investment activities," the report said.

In its low-risk scenario, the World Bank expects Russia's economy to grow by 1.3% next year.

"If there is an orderly resolution to the Crimean crisis, the economy would recover in 2015."

"Nevertheless, there would remain some tail risk of continued tensions, which would adversely affect growth over a longer period," it said.