Updates throughout with Kostin comments on Russian economic growth outlook, quotes, details and context

By Gleb Bryanski

ST PETERSBURG, June 4 (Reuters) - Russia's economic growth could stagnate this year as high borrowing costs choke capital investment, the CEO of Russia's second-largest bank, VTB, said on Thursday, though he expects an improvement when interest rates come down.

Andrei Kostin told Reuters that VTB expects no growth to 0.5% expansion in the economy, compared with the official government forecast of 0.4% in 2026. He is the first top-level banking executive to suggest that the economy could stagnate this year.

A fall in capital investment, which shrank by 14.3% in the first quarter, and high borrowing costs are considered major obstacles to Russia's economic growth.

VTB expects the central bank's key interest rate to be 11% or 12% by the end of the year, down from the current level of 14.5%, as inflation falls.

"I've always been a fan of (former British Prime Minister) Margaret Thatcher. She always said that the major enemy of any economy is inflation. And I think that's true now regarding the Russian economy," Kostin said in an interview on the sidelines of Russia's biggest economic conference in St. Petersburg.

PICKUP IN INVESTMENT FROM CHINA, ARAB COUNTRIES

Kostin was optimistic about investment from China and Arab countries, saying their companies have started to invest more in Russia this year and are ready to increase their investments when the war in Ukraine ends.

China and Arab countries have been cautious about their investments in Russia over four years of war, although China has massively increased sales of its products, from cars to electronics, to Russia.

"Particularly in the capital market, there is currently a lack of international investment. But we see changes now. We see that Chinese investors and investors from Arab countries have started to show significant interest in investing in Russia," Kostin said.

Saudi Arabia, whose delegation is headed by Energy Minister Prince Abdulaziz bin Salman, is officially the guest country of the forum, while a large Chinese delegation is headed by Chinese Vice President Han Zheng. Delegations from other Gulf countries are also present.

Kostin said that Chinese companies have been gradually switching from sales to investing in local production.

"We believe that there will be quite a big change for the better when the war stops. But even now, things are moving. They have started to be interested, and we expect significant investment, maybe this year and next year, in Russian fixed assets and probably even the stock market as well."

However, Kostin said that the high price the government is asking for assets it seized amid a confrontation with the West over the war in Ukraine is hindering their re-privatisation and should come down in line with the market.

An estimated $50 billion worth of assets owned by foreign investors and Russian billionaires were confiscated by the state, which is now trying to sell these assets to boost its budget revenues, strained by war spending.