Russia stares at recession as intensity of sanctions grows

Sanctions imposed by the US and the European Union are pushing Russia toward a recession as the intensity of their economic penalties increases after the annexation of Crimea earlier this month.

By Andra Timu, Henry Meyer ?and Olga Tanas (Bloomberg)

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Published: Tue 25 Mar 2014, 10:43 AM

Last updated: Fri 3 Apr 2015, 5:56 PM

Banks including state-run VTB Capital say the world’s ninth-biggest economy will shrink for at least two quarters as penalties for annexing Crimea rattle markets, curb investment and raise the cost of borrowing. Sanctions that have so far focused on individuals via visa bans and asset freezes may be expanded to target specific areas of the economy.

President Vladimir Putin sent his popularity surging to a five-year high by making Crimea a part of Russia again after 60 years and says he won’t be swayed by foreign retaliation. Even so, the costs of the decision are starting to unfold, with Russian stocks this year’s worst performers and the economy set to suffer more than the West, said Mircea Geoana, Romania’s government representative for diplomacy and economic projects.

“We’re witnessing the start of a new geopolitical and economic Cold War and I think it will take at least two to three years to establish some sort of equilibrium,” he said. “The ones who’ll pay the bill for this aggression, no matter how popular and patriotic it looks, will be the Russian people because there’s a huge difference between the economic force of the EU and the US and that of Russia.”

Russia’s Micex stock index has plunged 13.1 per cent this year compared with a 4.9 per cent decline for the MSCI Emerging Markets Index. It was little changed at 3:48 pm in Moscow.

The ruble is the second-worst performer against the dollar behind Argentina among 24 developing-market currencies tracked by Bloomberg, weakening 8.9 per cent. It rose 0.5 per cent on Monday.

After the US expanded sanctions March 20 to include businessmen linked to Putin, such as billionaires Gennady Timchenko and Arkady Rotenberg, Standard & Poor’s and Fitch Ratings cut their outlook on Russia’s credit grade to negative from stable, suggesting a downgrade is most likely next.

The two companies, which said Western banks are becoming reluctant to lend to Russia, rate the world’s biggest energy exporter at BBB, the second-lowest investment grade and on par with Brazil and South Africa.

Even before the standoff with the West, the worst since the Cold War, Russia’s economy was facing the weakest growth since a 2009 recession as consumer demand failed to make up for sagging investment. The current situation in the economy “bears clear signs of a crisis,” Deputy Economy Minister Sergei Belyakov said March 17 after the first European Union and US sanctions.

Russia will probably dip into a recession in the second and third quarters of this year as “domestic demand is set to halt on the uncertainty shock and tighter financial conditions,” according to Moscow-based VTB.

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