You're reading: Russia’s economy pays for Putin’s aggression

Russia is paying an economic price for its aggressive policy towards Ukraine, although not a high enough one yet to make Russian President Vladimir Putin drop his aggressive stance.

Still, despite the light sanctions so far from Western democracies, Russia has suffered more than $50 billion capital flight in the first three months of the year, a nine percent ruble devaluation and a mild recession.

The military invasion and annexation of Ukraine’s Crimean peninsula in March, followed by Russia’s support of separatists in Ukraine’s southeastern regions, is spooking investors. Investors are seeking alternative places for their capital since Russian securities do not look too attractive in light of possible introduction of harder sanctions by the West.

The International Monetary Fund revised its Russia’s economic growth forecast for 2014, cutting it from 1.3 percent to 0.2 percent. By comparison, the IMF expects the Chinese economy to grow by 7.5 percent this year.

Inflation hit 7.3 percent in May, which is a hard punch in Putin’s populist policy as high pensions and effective programs of social support are still seen by the local population as president’s main accomplishments.



Performance of the Russian rouble against the U.S. dollar

The Russian Central Bank lost $30 billion of its reserves since the beginning of the year, mainly to defend the weakening ruble. Reserves were at $483 billion in mid-April. Besides, the regulator had to raise key interest rate, from 5.5 percent at the start of March to 7.5 percent, which will dampen access to credit.

The local stock market declined by 13.5 percent since the beginning of the year as investors keep selling shares of Russian companies. American $190 billion global bond group Franklin Templeton Foundation reduced its Russian portfolio by $200 million as conflict between Russia and Ukraine escalated. Now it holds $1.2 billion in Russian bonds and $7.5 billion in Ukrainian ones, meaning that investors are much more optimistic about future of Ukraine’s economy.



MICEX, benchmark gauge of stocks traded in Moscow

A survey of Russian business by MNI, a research firm, showed a sharp drop in orders from abroad in April. Consumer sentiment indicator diminished quite substantially too.

“Russia’s actions in Ukraine were never going to be costless and consumer confidence has taken a battering over the past two months as worries over their personal finances and the outlook for the economy have grown,” MNI Indicators chief economist Philip Uglow said.

To be fair, Russia has strong financial background – its budget deficit was just at 1.3 percent of country’s gross domestic product in 2013, while government’s debt reached only 13 percent of GDP. For instance, the European Union has 3.3 percent and 87 percent in those indicators respectively. However, Russian economy is already operating at its full capacity and is not able to grow at any significant pace.

Standard & Poor’s, a global credit worthiness watchdog, in its 2013 report said that Russia has already exhausted its resource-based model of economic development, under which 75 percent of exports come from oil and gas, and those revenues supply 50 percent of the national budget. Consequently, Standard & Poor’s has recently lowered the country’s credit rating to just one notch above junk.

The European Union gets 30 percent of its oil and gas from Russia, but the 28 nations are trying to cut their dependence. Moreover, European authorities are considering the cancellation of the South Stream project, a gas pipeline that bypasses Ukraine.

Russia’s economy is seen as highly uncompetitive.

“We will not recover soon,” says Vasiliy Koltashov, economic analyst for Moscow-based Institute of Globalization and Social Movements. He foresees substantial unemployment growth in the country with world’s 9th population as importers will be occupying larger share of the market.

“It is a problem to find a decent job even in Moscow now,” says Denis Smirnov, 31, an event manager who has been living in Russian capital city since 2005.

However, Putin is trying to sound self-assured. During a March 12 economic meeting in Sochi, the Russian president – like his Soviet predecessors — said that the situation in the country’s economy is stable and that financial indicators are “relatively positive” with several industries showing growth.

Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].