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Backlash over Crimea hits Russian economy

RUSSIA-ECONOMY-FOREX-CURRENCY

A woman stands under a board listing foreign currency rates against the Russian ruble outside an exchange office in central Moscow.

The Russian economy is beginning to suffer fallout from the crisis in Ukraine.

Economy Minister Alexei Ulyukayev told parliament in Moscow today that growth slowed sharply to just 0.8 percent in the first quarter -- far short of the earlier prediction of 2.5 percent. The minister said that the Ukrainian turmoil had spooked investors, and capital is fleeing the country at a record rate. Earlier in the week, the Russian finance minister forecast that if the capital flight continues the economy could see zero growth this year. Independent observers are equally gloomy.

"Everything seems to be going in the wrong direction for Russia at the moment,” says Raoul Ruparel of the Open Europe think tank in London. "It’s really due to increasing uncertainty around the situation in Ukraine and potential sanctions.”

So far, the U.S. and the Europeans have imposed travel bans and asset freezes on certain Russian and Ukrainian officials. The European Union has threatened to escalate the sanctions if peace talks due to begin in Switzerland on Thursday fail to make progress, and if Russia persists with what the EU calls its “provocation.”

 But Russian President Vladimir Putin seems unfazed by all the threats.

"Regaining Russian lands is taking precedence over practical , economic considerations," says Daragh McDowel of the Maplecroft research house.

 Other analysts argue that Putin has no reason to feel seriously threatened -- yet.

"The Russians have the third largest hard currency reserves in the world – a half a trillion dollars' worth - and that could cushion the capital flight," says Sam Charap of the International Institute for Strategic Studies. "So I don’t see a dramatic, huge, short-term economic impact from this."

A European embargo on imports of Russian oil and gas or a ban on Russian banks to stop them dealing in western financial markets could be a different matter. That could bring Russia to its knees. But such drastic action – which could also inflict real economic damage on Europe - seems highly unlikely... unless Russia invades eastern Ukraine.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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