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.

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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Iran-Saudi Arabia Rivalry May Be Set To Ease, Or Get Much Worse

The Saudis may be awaiting the outcome of Iran's nuclear talks with the West, to see whether Tehran will moderate its regional policies, or lash out like never before.

Military parade in Tehran, Iran, on Oct. 3


LONDON — The Iranian Foreign Ministry spokesman Saeed Khatibzadeh said earlier this month that Iranian and Saudi negotiators had so far had four rounds of "continuous" talks, though both sides had agreed to keep them private. The talks are to ease fraught relations between Iran's radical Shia regime and the Saudi kingdom, a key Western ally in the Middle East.

Iran's Foreign Minister Hossein Amirabdollahian has said that the talks were going in the right direction, while an Iranian trade official was recently hopeful these might even allow trade opportunities for Iranian businessmen in Saudi Arabia. As the broadcaster France 24 observed separately, it will take more than positive signals to heal a five-year-rift and decades of mutual suspicions.

Agence France-Presse news agency, meanwhile, has cited an unnamed French diplomat as saying that Saudi Arabia wants to end its costly discord with Tehran. The sides may already have agreed to reopen consular offices. For Saudi Arabia, the costs include its war on Iran-backed Houthis rebels fighting an UN-recognized government in next-door Yemen.

The role of the nuclear pact

Bilateral relations were severed in January 2016, after regime militiamen stormed the Saudi embassy in Tehran. Amirabdollahian was then the deputy foreign minister for Arab affairs. In 2019, he told the website Iranian Diplomacy that Saudi Arabia had taken measures vis-a-vis Iran's nuclear pact with the world powers.

It's unlikely Ali Khamenei will tolerate the Saudi kingdom's rising power in the region.

He said "the Saudis' insane conduct toward [the pact] led them to conclude that they must prevent [its implementation] in a peaceful environment ... I think the Saudis are quite deluded, and their delusion consists in thinking that Trump is an opportunity for them to place themselves on the path of conflict with the Islamic Republic while relying on Trump." He meant the administration led by the U.S. President Donald J.Trump, which was hostile to Iran's regime. This, he said, "is not how we view Saudi Arabia. I think Yemen should have been a big lesson for the Saudis."

The minister was effectively admitting the Houthis were the Islamic Republic's tool for getting back at Saudi Arabia.

Yet in the past two years, both sides have taken steps to improve relations, without firm results as yet. Nor is the situation likely to change this time.

Photo of Iranian Supreme Leader Ali Khamenei in 2020

Iranian Supreme Leader Ali Khamenei in 2020

Riyadh's warming relations with Israel

Iran's former ambassador in Lebanon, Ahmad Dastmalchian, told the ILNA news agency in Tehran that Saudi Arabia is doing Israel's bidding in the region, and has "entrusted its national security, and life and death to Tel Aviv." Riyadh, he said, had been financing a good many "security and political projects in the region," or acting as a "logistical supplier."

The United States, said Dastmalchian, has "in turn tried to provide intelligence and security backing, while Israel has simply followed its own interests in all this."

Furthermore, it seems unlikely Iran's Supreme Leader Ali Khamenei will tolerate, even in this weak period of his leadership, the kingdom's rising power in the region and beyond, and especially its financial clout. He is usually disparaging when he speaks of Riyadh's princely rulers. In 2017, he compared them to "dairy cows," saying, "the idiots think that by giving money and aid, they can attract the goodwill of Islam's enemies."

Iranian regime officials are hopeful of moving toward better diplomatic ties and a reopening of embassies. Yet the balance of power between the sides began to change in Riyadh's favor years ago. For the kingdom's power has shifted from relying mostly on arms, to economic and political clout. The countries might have had peaceful relations before in considerably quieter, and more equitable, conditions than today's acute clash of interests.

If nuclear talks break down, Iran's regime may become more aggressive.

Beyond this, the Abraham Accord or reconciliation of Arab states and Israel has been possible thanks to the green light that the Saudis gave their regional partners, and it is a considerable political and ideological defeat for the Islamic Republic.

Assuming all Houthis follow Tehran's instructions — and they may not — improved ties may curb attacks on Saudi interests and aid its economy. Tehran will also benefit from no longer having to support them. Unlike Iran's regime, the Saudis are not pressed for cash or resources and could even offer the Houthis a better deal. Presently, they may consider it more convenient to keep the softer approach toward Tehran.

For if nuclear talks with the West break down, Iran's regime may become more aggressive, and as experience has shown, tensions often prompt a renewal of missile or drone attacks on the Saudis, on tankers and on foreign shipping. Riyadh must have a way of keeping the Tehran regime quiet, in a distinctly unquiet time.

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