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Experts: Crimea a Brief Distraction from Russia's Economic Woes

Cashier counts pension payment in Russian roubles, post office at Simferopol, Crimea, March 25, 2014.Cashier counts pension payment in Russian roubles, post office at Simferopol, Crimea, March 25, 2014.
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Cashier counts pension payment in Russian roubles, post office at Simferopol, Crimea, March 25, 2014.
Cashier counts pension payment in Russian roubles, post office at Simferopol, Crimea, March 25, 2014.
Reuters
The annexation of Crimea will only temporarily distract Russians from worrying about the economy, a respected economist said, suggesting a rally in President Vladimir Putin's ratings may not last.

The standoff with the United States and the European Union over the Black Sea region has won Putin support at home but Western sanctions and capital withdrawals by nervous investors are expected to damage the economy.

A weaker rouble, leading to inflation, and slower growth may eventually hurt Russian budgets, and voters could turn on the ruling elite, Mikhail Dmitriev, of the Moscow-based Center for Strategic Research think tank, said.

"If there is no economic growth it is likely that the influence of Crimea and other foreign policy events on political ratings won't be long-lasting," Dmitriev, who predicted mass protests against Putin in 2011-2012 said in an interview.

"The population will start to look at politics from the point of growing economic struggles."

Dmitriev was beaten and had his laptop stolen by unidentified people last week. It is unclear whether the attack was related to his work and sometimes forthright views.

While many Russians are proud of the stance that Putin has taken on the majority ethnic Russian region, some are wary of the impact on the economy and recall the financial crisis of 1998 when Russia devalued the rouble and defaulted on its debt.

Inflation soared and shop shelves emptied as Russian stocked up on essential food items and millions lost their life savings as banks collapsed. Russians took to the streets in protest and President Boris Yeltsin fired his prime minister.

However, Dmitriev said it would be a while before Putin's popularity was affected.

"For now, the situation in Crimea is to the fore and is shaping the population's political mood," he said. "But when it comes to long-term preferences, economic conditions are absolutely dominant and people's attitude towards the Russian authorities in the end will depend on the economic situation."

On Wednesday, the World Bank warned that the Russian economy could shrink by 1.8 percent in 2014 and the country could see record capital outflows of $150 billion if the crisis over Crimea deepens.

Alexander Rubtsov at the Institute of Philosophy at the Russian Academy of Sciences says events such as the annexation of Crimea have "the champagne effect" — a rapid, but short-lived high which — is often followed by a "hangover."

Putin's approval ratings have soared to a five-year high of more than 75 percent after Russia hosted the winter Olympics and since he claimed back Crimea, 60 years after the region was handed to Ukraine by Soviet leader Nikita Khrushchev.

He dominates the political scene in Russia, and his grip on power is strengthened by a loyal parliament and pliant media. His term expires in 2018.

The wave of patriotism and euphoria in the state media have drowned out news about a weakening economy, where growth fell to 1.3 percent last year from 3.4 percent in 2012.

Most analysts see the economy ministry's forecast for 2.5 percent in 2014 as wildly optimistic.

Shares on the local stock exchange, once seen by some in the political elite as a centerpiece for Moscow's transformation into a financial center to rival New York and London, lost some $70 billion this month as investors pulled out of Russia.

EU and U.S. visa bans and asset freezes on Russian officials and businessmen over Crimea have worsened capital flight and weakened the rouble, which is down 8 percent against the dollar this year, putting pressure on consumer price inflation.

"If problems with Russian exports arise it may create difficulties over serving corporate debt, [and] put additional negative pressure on the rouble," said Dmitriev, a former first deputy economy minister under Putin.

The external debt of Russian corporations stands at more than $650 billion, according to the central bank, making firms and the Western financial system closely interconnected but still leaving room for a spike in borrowing costs.

Last week, Fitch ratings agency revised Russia's outlook to negative, warning that foreign investors may be reluctant to lend to Russia with the economy slowing further and the private sector requiring support.

Russian gold and foreign exchange reserves stood at $493.2 billion last week, down $16.4 billion since the end of 2013, mostly due to the central bank's market interventions to curb the rouble's fall.

"In theory, if further developments in Ukraine are accompanied by military confrontation ... Russia may face a serious worsening in external trade conditions and investments, leading to an economic crisis which may be accompanied with a no less serious sequel in terms of domestic political situation," Dmitriev said.

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