Russia braces for sanctions over Crimea takeover


MOSCOW: Zero growth or even recession in 2014, asset freezes in the West and tens of billions of dollars in capital flight—Russia must brace for the consequences of putting political ambition above economic sense in seizing control of Crimea, analysts say.

The huge ‘yes’ vote in the disputed referendum in the Ukrainian region of Crimea to become part of Russia means Moscow has claimed an addition to its territory for the first time since the end of World War II.

But President Vladimir Putin’s swoop has given the Kremlin’s economic policy makers an unenviable task of limiting the inevitable damage to the economy which was already showing troubling signs of weakness.

“There are many signs the economy is now being hit by an uncertainty shock,” said analysts at VTB Capital, slashing their forecast for growth in Russia in 2014 to zero.

“We see downside risks if uncertainty remains elevated for a protracted period or if severe sanctions are imposed,” VTB added.

It remains to be seen how far the European Union and the United States dare to go in sanctions — they could choose more superficial measures like visa bans or tough measures freezing state assets and hitting the wider economy.

Analysts call the second option the “Iranian scenario” as it recalls the measures slapped against Tehran over its nuclear programme that eventually brought the Iranian economy to its knees.

“The Russian economy is already weak, and this crisis — even in the best case scenario of sanctions being limited to political and diplomatic things — will further slow growth to a virtual stand-still,” said Erik Nielsen, chief global economist at Unicredit.

If tough sanctions were imposed, then “Russia almost certainly will sink into recession,” he said.

There are already signs that Russia has been battening down the hatches in anticipation of serious trouble.

A record drop of over $100 billion in US treasury securities held by foreign banks in the week ending to March 12 was attributed by analysts to Russia taking its money elsewhere in anticipation of possible asset freezes.

“It is quite possible that these are withdrawals that have been made by the Russians,” said Rene Defossez, a strategist at Natixis in London. “If you were a Russian investor, you would not want to have your capital blocked abroad.”

There have also been reports that Russian state-owned banks have been pulling their money out of Western banks with operations in the United States in fear of US sanctions.

Meanwhile the Vedomosti daily reported Monday that in a rare sign of flexibility Russian gas giant Gazprom was discussing discounts with European clients in the hope of winning their support if the EU tries to move away from Russian gas imports.

The Kommersant daily said the chief executive of Gazprom Alexei Miller and the chief executive of Russia’s largest gas firm Rosneft Igor Sechin were on a black list of Russians who could be banned from entering the EU and their assets could also be frozen.

“This is stupid and petty sabotage, above all against themselves (the EU),” the deputy head of Rosneft Mikhail Leontyev told the paper.

The Russian edition of Forbes magazine cited bankers as saying that unpublished figures show that capital flight from Russia in the first quarter amounted to $55 billion.

It said that the central bank could be forced to put restrictions on the withdrawal of capital from Russia. “It seems to me that they are working on this issue today,” it quoted one banker as saying.

“Russia has made the first move in a possible economic conflict on the great chess board,” said Vedomosti.



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