Rus­sia counts eco­nomic cost of Crimea in­ter­ven­tion

The Pak Banker - - COMPANIES/BOSS -


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 semi­iso­la­tion 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.

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.

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 20082009 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. 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.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.