Armed men in masks, representing Ukrainian special forces, stand guard outside the regional administration building in Kharkiv, April 8, 2014. Ukraine has launched an "anti-terrorist" operation in the eastern city of Kharkiv and about 70 "separatists" have been arrested for seizing the regional administration building, Ukrainian Interior Minister Arsen Avakov said on Tuesday.

Washington - Ukraine is facing a severe contraction in its economy due to the country's political turmoil and tension with Russia, the International Monetary Fund said Tuesday.

The Washington-based crisis lender offered no estimate for Ukraine's economy in light of the crisis, in which Russia has seized and annexed the Crimean Peninsula.

“Output (in Ukraine) will likely drop significantly as the acute economic and political shocks take their toll on investment and consumption,” the IMF's World Economic Outlook said.

“Toward the end of 2014, net exports and investment recovery should bring back moderate growth.”

The IMF slashed its outlook for Russian growth to 1.3 per cent for 2014, down 0.6 percentage points from its last estimate in January.

The country's economy grew by a tepid 1.3 per cent last year.

“The fallout from emerging market financial turbulence and geopolitical tensions relating to Ukraine are headwinds on the back of already weak activity,” the IMF wrote.

Last month, the IMF offered Kiev's interim authorities up to 18 billion dollars in loans over two years - to help Ukraine stave off financial collapse after months of unrest, a government collapse and the Crimea crisis.

The United States and European Union in recent weeks have sought to penalize Russian authorities while offering aid and trade links to Ukraine.

The Ukraine crisis has regional economic ramifications, the IMF said.

“Near-term prospects in Russia and many other economies of the Commonwealth of Independent States have been downgraded, as growth is expected to be hampered by the fallout from recent developments in Russia and Ukraine and the related geopolitical risks. Investment had already been weak, reflecting in part policy uncertainty.”

The IMF said that “greater spillovers to activity beyond neighbouring trading partners could emerge” if further turmoil unnerves global financial markets, or if sanctions and counter-sanctions intensify.

Spillover effects could come especially from “major disruptions” in the production or transportation of gas, oil or even the corn and wheat crops.

Contagion could spread through trade and remittances in the real economy, as well as financial disruption.

“Even in the absence of sanctions, lower growth in Russia and Ukraine could have a significant impact on neighbouring economies over the medium term,” the IMF said.

The crisis struck just as the Ukrainian economy had been recovering, with a “bumper harvest” and resilient private consumption that lifted the country from recession in the fourth quarter of 2013, the IMF found. - Sapa-dpa