Former European Union Trade Commissioner, Lord Peter Mandelson, is warning the next few months are crucial for the Russian economy as volatility continues to spook both investors and consumers.

Moscow is embroiled in a tense stand-off with Washington and its allies in London, Berlin and Paris, concerning the recent annexation of Crimea and the fall-out is starting to affect automotive sales with the Association of European Businesses noting a 4% fall last month alone.

“I think the job of friends of Russia and Russian business is to be candid as well as supportive,” said Mandelson, who was also instrumental in setting up the UK’s Automotive Council, addressing this year’s St Petersburg International Economic Forum (SPIEF).

“Overall, this year’s Forum is an occasion for realism and there is a great deal riding for the Russian economy on what happens, particularly in the coming few months.”

“Events in Ukraine, including the illegal annexation of Crimea, have brought some short-term tactical advantage to Russia, but in my view…the wider political instability it has sparked may turn this into a pyrrhic victory.”

AvtoVAZ CEO, Bo Andersson, told just-auto in St Petersburg he estimated it would take two years for the Russian market to recover from its present malaise and the former Trade Commissioner in Brussels backed such caution.

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“Since 2011, we have seen Russian economic growth slowing and now stalling,” said Mandelson. “The International Monetary Fund expects growth of only 1.3% this year. This adds up to a big cut in living standards of Russian citizens.

“The boom years were driven by two factors, most obviously high energy prices, but also the massive spare capacity that created room for expansion. Russia needs a new economic model if income levels are to keep rising – less State more private enterprise – less hydrocarbon dependency.

“The pattern of high rhetoric followed by weak implementation is now starting to recur with depressing familiarity.”

The vast range of energy companies at SPEIF 2014 clearly reflects Russia’s huge practical and political influence in the supply of power, but Mandelson also highlighted the country’s vulnerability in the event prices fell dramatically,

“US shale production and fast growing LNG today are turning an expanding global supply of gas to the highest bidder in much more flexible ways,” he said. “This will have a transforming effect on Russia.

“Energy accounted for two-thirds of exports in 2012, showing just how vulnerable Russia is to a drop in prices.”

Mandelson also highlighted the significant outflow of capital from Russia – a trait he said started before the current sanctions regime – as well as a drop in FEX reserves leading the country’s Central Bank to hike interest rates to 7.5%.

“Growth is now slowing if not faltering,” said Mandelson. “The economy needs major structural change if not overhaul.”