News / Europe

Ukraine Crisis, Sanctions Taking Toll on Russia Economy

Ukraine Crisis, Sanctions Taking Toll on Russia Economyi
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Mil Arcega
March 25, 2014 10:52 PM
The Ukraine crisis appears to be doing damage to Russia’s economy. Although Russian leaders have downplayed the impact of recent U.S. and European sanctions, analysts say capital has been pouring out of the country as risk-averse investors seek safer returns. With Russia’s economy barely growing, some warn the country could slip into a recession as international outrage and economic sanctions intensify. VOA's Mil Arcega has more.
Ukraine Crisis, Sanctions Taking Toll on Russia Economy
The World Bank warned Wednesday that Russia's economy could contract by 1.8 percent this year if the Ukraine crisis drags on. Although Russian leaders have downplayed the effects of recent U.S. and European sanctions, economists say capital already is pouring out of the country as risk-averse investors seek safer returns.  Russia’s economy is barely growing now, and there increasing signs there are signs of more pain to come if international outrage and economic sanctions intensify.

Although Russian leaders have downplayed the impact of recent U.S. and European sanctions, analysts say capital has been pouring out of the country as risk-averse investors seek safer returns.

With Russia’s economy barely growing, some warn the country could slip into a recession as international outrage and economic sanctions intensify.

Russia is the world’s ninth largest economy and last year it expanded by a tepid 1.3 percent. But this year, Russia’s economy will be lucky to grow at all. Russian stocks have tumbled nearly 14 percent this year, the ruble has fallen 11 percent against the dollar, and inflation is likely to top 7 percent in March.

The economic weakness combined with the threat of more sanctions was enough to prompt the Standard and Poor's ratings agency to revise its outlook from "stable" to "negative."
Bank Rossiya in St. Petersburg, one of two Russian banks on the U.S. Treasury's sanctions list, March 21, 2014.Bank Rossiya in St. Petersburg, one of two Russian banks on the U.S. Treasury's sanctions list, March 21, 2014.
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Bank Rossiya in St. Petersburg, one of two Russian banks on the U.S. Treasury's sanctions list, March 21, 2014.
Bank Rossiya in St. Petersburg, one of two Russian banks on the U.S. Treasury's sanctions list, March 21, 2014.
"The poor investment climate and investor sentiment has already extracted a price," said John Chambers, chairman of S&P’s sovereign ratings committee, "and that contributed to our lowering our growth forecast for this year and next and assigning the negative outlook because we didn’t think the risks to the rating were any longer balanced."

Investors have pulled about $70 billion from Russia’s economy since the crisis began. German Gref, the head of Russia’s state-owned Sberbank, warns the country could slip into recession if the trend continues.
 
“Everything depends on what scenario we will see, on how the situation develops," Gref said. "If capital outflows reach $100 billion, the economic growth will likely hit zero.”

But Russia is not entirely helpless.  Its central bank has enough capacity to absorb a greater exodus of capital. It could also fight back by shutting off gas exports to Europe, which relies on Russia for about a third of its energy needs.

Bankrate.com’s Mark Hamrick says that fact is not lost on the European Union.

“It’s the question of unintended consequences of an escalating crisis," he said. "And so what happens if Russia starts taking steps? Then we re-escalate our response, and then the issue of fuel being supplied to Europe becomes a question mark.”

If that happens, the economic pain could spread around the globe. But it would also hurt Russia, which receives more than 50 percent of its revenues from energy exports.

One way to know if the sanctions are succeeding is when average citizens start feeling the pain, says Boston University professor Igor Lukes.

“I think what has to happen is that the sanctions have to have an impact on the overall standard of living in the country," Lukes said, "which then causes a decline in the current enthusiasm of the Russian public for Mr. Putin.”

That may be happening already. Prices for food and imported items are surging and some Muscovites have reported problems accessing funds at banks targeted by U.S. and European sanctions.

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by: heho from: kenya
March 26, 2014 12:29 PM
Biased article.can you analyse other countries in EUROPE to see effect on each country.And what was the effect of Iraq war on US economy which was equivalent to Russians Ukrainian crisis

by: Gennady from: Russia, Volga Region
March 26, 2014 10:06 AM
Dear Anonymous!
What do you know about what is going on in dozens upon dozens millions Russian hearts and minds right now? From your incessant senseless rattling about what should the Russian do, it has become clear that you know absolutely nothing. And you has become a laughing stock in eyes of those who knows Russia from inside.Your ignorance of our country and national psyche is outstanding: the latest independent public polld showed about 80% approval of Putin’s recent actions. Who else among world leaders has got such highest rating? And personally for Mr Putin, it’s his highest rating ever in all years of his more than decade of leadership. Even his misdeeds are no longer mentioned.

by: Anonymous
March 26, 2014 12:42 AM
Excellent work tighten the noose on Putin until the people in Russia overthrow him for his crimes. God bless the Russian people to hell with Putin. Every Russian I know cant stand Putin. He will damage the Russians by his reckless and careless acts. Its time the Russians oust him. Arab Spring in Russia is next.
In Response

by: Anonymous
March 26, 2014 5:00 AM
I want to take bandage off from your eyes, previous autor mr. Anonymous, the most of russian people support our president in Ukrainian Crisis and in Crimea task. I also want to say mr.Godwin from Nigeria, that mr. Lavrov is the best minister of international affairs that I've ever seen, at least in Russia, compare to mr. Kozyrev. As it says 'Kerry'es income and outcome, but Lavrov stays on'

by: Godwin from: Nigeria
March 25, 2014 9:18 PM
Now I see that Lavrov is a fool, not the strong man of international diplomacy I thought he was. If he can be there and USA and Europe run Russia ring with threat of sanctions that begin to weaken Russian economy even when not put in place yet, then there is nothing to write home about both himself and his country. It simply means all Russian allies have no hope of survival and should make quick exit to find greener pastures before it is too late. I had thought that the next sound coming out of Kremlin was going to be earth shaking, instead Lavrov went to the nuclear summit in the Netherlands to mend fence. What did he get in return? A wounded Russia! Russia should do something soonest, even if it has to be a stupid thing - anything at all - to restore confidence in itself. Otherwise it's going to suffer even more cold isolation from unofficial circles than it has lost face with its allies by bowing so easily to US-EU led pressure.

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