Russia counts economic cost of Crimea intervention
Russia has started counting the cost of seizing Crimea from Ukraine to its already stuttering economy, anxiously hoping that the West will refrain from implementing a second wave of sanctions that would cause even greater damage.world Updated: Mar 30, 2014 09:13 IST
Russia has started counting the cost of seizing Crimea from Ukraine to its already stuttering economy, anxiously hoping that the West will refrain from implementing a second wave of sanctions that would cause even greater damage.
Moscow, already excluded from the G8, is planning for at least economic semi-isolation from the world for the next years with President Vladimir Putin this week saying Russia should create its own credit card system.
Western sanctions have so far only imposed visa bans and asset freezes on senior officials -- some close to Putin -- but the fear of further action hurting the wider economy is already causing damage with the stock market down 6 percent in March.
The most immediate hit has been on capital outflows which are estimated by economists and officials to have surged to $60-70 billion for the first quarter, more than for all of 2013 combined, as investors took fright at the uncertainty.
Knowingly paying the price
Russian Economy Minister Alexei Ulyukayev last week became the first top official to admit the Crimea intervention would badly hit GDP, slashing to ribbons the government's previous 2014 growth estimate of 2.5 percent.
He said growth would be a measly 0.6 percent in 2014 if capital flight was around $100 billion for the full year, a figure that some economists see as wildly optimistic given the current trends.
The economy would contract by 1.8 percent if capital flight reached $150 billion for the year due to a projected eight percent decline in investment, he added, echoing a prediction by the World Bank.
"The key discussion on the market now is whether Russia can maintain a positive growth rate, or will it slide into decline," said economist Natalya Orlova at Alfa Bank.
Alexei Kudrin, the long-serving finance minister who resigned in 2011 but is known to retain Putin's trust, said that Russia was knowingly paying a colossal economic cost for a political decision.
"We are paying hundreds of millions of dollars for this development of events. If this was the choice that has wide support then we have to understand that it has an economic cost," he said, quoted by the RIA Novosti news agency.
Low growth trap
The risk for Putin is particularly grave as the consequences of the Crimea adventure come at a time when Russia is already struggling with low growth due to its failure to reform an economy held back by dependence on energy exports.
"Russia's slowdown is, to a large extent, structural," Standard and Poor's said in a report on the crisis this week.
Russia enjoyed stellar rates of growth in the early years of Putin's domination, culminating in 8.5 percent in 2007. Then came the 2008-2009 financial crisis, after which Russia staged an only faltering recovery with growth of just 1.3 percent in 2013.
Business daily Vedomosti said that the concern was now that with the political crisis burning, questions of economic reform would be forgotten.
"Already it is like reforms are not going to be thought about -- experts have become objects of suspicion, ratings agencies are not trusted and non-traditional investors in other markets are being searched for."
Standard and Poor's and Fitch have already both downgraded their outlook on Russia's credit ratings to negative, moves that prompted some officials to suggest Russia needed to create its own ratings organisations.
Crucial will be whether the West intends to go further with sanctions on trade or financial markets which would have an immediate negative impact on the Russian economy.
This should depend largely on whether Putin decides to go beyond the seizure of Crimea by moving into Russian-speaking regions in the east and south of the country, an act which would cross a new red line with the West.
"A move up to more dangerous sanctions is still unlikely unless Russian forces move into another part of Ukraine," said Chris Weafer of Macro Advisory in Moscow.
Standard and Poor's said it believed "self interest would prevail" with the EU also wary of the risk of disruption.
The perils of isolation
Russia is not yet close implementing its own version of "autarky", the concept of total economic self sufficiency cut off from the outside economy espoused by regimes from Nazi Germany to North Korea.
Economists have warned that cutting Russia off from the Western economy -- an idea sometimes raised by Putin's radical advisor Sergei Glazyev -- would be a disaster for the country and its current leaders.
Putin indeed appears keen not to burn the bridges and held a conspicuous meeting on March 26 with the chief executive of Siemens, Joe Kaeser, who promised that the German industrial giant planned long term investment in Russia.
"Our integration in the world allows us cheaper investment and supports our growth. If we distance ourselves from the world economy our growth is going to be slower and every percentage of GDP will cost more," said Kudrin.