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Russia

Putin Won't Admit It, But Ukraine Crisis Is Hitting Russia's Economy Hard

Lower visibility, a falling ruble and rising inflation: The Ukrainian crisis is taking its toll on the Russian economy.

Gazprom CEO Alexander Medvedev
Gazprom CEO Alexander Medvedev
Benjamin Quénelle

MOSCOW — As recently as March, Western sanctions inspired nothing but mockery under the gilded Kremlin decorations. In front of an audience already won over to his cause, Vladimir Putin had just made the annexation of Crimea official.

Washington and Brussels’ measures against certain eminent members of this elite crowd weren't even mentioned in the patriotic speech delivered by the president — who, since then, has been blowing hot and cold on the Ukrainian crisis.

Back in March, Vladislav Surkov, an influential advisor now banned from entering the U.S. and who may see his assets frozen, was so bold as to boast: “I am proud to be sanctioned!”

The only dissenting voice, in a corner of the Kremlin hall, was Alexander Shokhin, the head of the country’s union of industrialists and entrepreneurs, who put it in simple business terms: “All of this is bad for the economy.”

Like other liberals close to the Kremlin, Shokhin has since then kept quiet. Alexei Kudrin, the former finance minister who regularly participates in crisis meetings with the president, has also remained hushed.

“Loans are becoming scarce. Certain joint projects will be stopped; it has already started,” he warned at the end of March. Since then, he hasn't said a word.

Behind the scenes, liberal warnings seem quite weak compared to the Kremlin’s steamrolling propaganda, which is restless against the “fascist putschists” from Kiev and their guilty Western supporters, but more discreet on the economic consequences of the crisis for Russia itself.

A country in the red

But all the gauges are heading into the red. Russia’s Central Bank revealed on May 12 that, back in March, people were getting rid of their rubles at a level that had not been reached in four years (10 billion euros in total), buying euros and dollars instead.

The fall of the currency (10% since the beginning of the year — as much as the whole of 2013) is accelerating inflation via imports, and threatening consumer markets that are the main driving force of growth. A majority of banks have also cut back on loans. The Finance Ministry has found that the country was already in "technical recession." The country's GDP fell in the first quarter, compared to the three months before that (-0.5%), and this trend is expected to continue in the next few months.

Finance Minister Anton Siluanov himself acknowledged that there may be zero growth in 2014 because of the “geopolitical” disruptions. Russian authorities initially hoped on a 2.5% rebound after a substantial slowdown over the past few years (1.4% in 2013, far from the 7% of the 2000s and the 5% Putin promised in 2012).

What about investments?

The Ukrainian crisis has, above all, created a new obstacle to investments. The acceleration of capital flight alone, which officially reached 46 billion euros in the first quarter (four times more, according to other sources), reflects the growing concern. Standard & Poor’s downgraded Russia’s credit rating score from "BBB" to "BBB-," with a negative outlook.

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Moscow International Business Center — Photo: BpbAlonka

And though the country is not heavily in debt, a new downgrading could create serious problems for public groups, who would struggle to borrow on international markets to finance their major projects. S&P has also just downgraded a series of major companies, including energy giants Rosneft, Loukoil and Gazprom — but also the VTB bank and the railway company RJD. Some of them have already announced lower financial results.

“Today, authorities seem to have written off the 2% growth,” an observer in Moscow's economic elite says. Delays in investments were already the weakest point of the Russian economy. The Ukrainian crisis is only making the problem worse by further deteriorating the business climate — feeding an already vicious circle.

Panic and uncertainty

As such, Washington and Brussels’ first measures admittedly have limited macroeconomic effects. But they are aggravating the situation by creating a new layer of uncertainty, because the threat of more generalized sanctions is lingering and because the individual sanctions have already created a mini wave of panic in the business sector.

For the past two months, concern has also been voiced in specialized forums and conferences. Internet professionals say the recession may catch up with this industry, despite the fact that it is booming. In the supply and service sectors, some agreements have been suspended and discussions postponed. Officials in the transport sector have warned that infrastructure projects would be indefinitely put on hold in the case of military escalation.

There is less and less visibility and more and more uncertainty in every sector. Bank funding sources may run dry. Being excluded from the G8 could mean that all the country's efforts of opening up to the global economy are being challenged. Russia — whose modernization and diversification were already failing to impress in comparison to other emerging countries — could close up on its oil and gas industries.

As a Russian businessman recently put it: "In 2014, it’s not really business as usual anymore."

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Geopolitics

Modi Is Wrong: Russia's War Also Creates Real Risks For India

By shrugging aside Russia’s aggression, India has shown indifference to fears that China could follow Russia’s example.

Photo of India's Prime Minister Narendra Modi and Russian President Vladimir Putin

India's Prime Minister Narendra Modi Visits Russia

Anita Inder Singh*

-OpEd-

NEW DELHI — India is wrong to dismiss Russia’s war in Ukraine as Europe’s problem. The illegality and destructiveness of the invasion, and consequential food and energy crises, have global ramifications.

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This explains why 143 out of the 193 member-states of the UN General Assembly voted against recognizing Russia’s illegal annexation of four Ukrainian regions after holding sham referenda there. Ninety-three voted in favor of expelling Russia from the UN Human Rights Council.

India has abstained from every vote in the UN condemning Russia’s aggression in Ukraine. The reason? Moscow is India’s top arms supplier and some 70% of India’s military platforms are of Russian origin.

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