Russian Economy, Already Bruised, Faces Greater Pains Over Ukraine Crisis

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"Russian Economy, Already Bruised, Faces Greater Pains Over Ukraine Crisis"

Russian president Vladimir Putin, left, speaks at a Cabinet meeting

Russian president Vladimir Putin, left, speaks at a Cabinet meeting

CREDIT: AP Photo/Sergei Karpukhin, Pool

As Russia stands accused of supporting armed takeovers of government buildings in eastern Ukraine, its own economy is taking a hit from the crisis, as fears of war and greater Western sanctions depress its markets and slow its growth.

Russian Fiance Minister Antonin Siluanov on Tuesday said that Russia’s economic growth over the next year would remain low, possibly approaching zero. Faced with the costs associated with supporting the newly annexed Crimean peninsula, Moscow is being forced to dip into its rainy day savings from its period of prolonged economic growth in the last decade, a move that isn’t helping an already slowing Russian economy. “We consider it impossible to increase budget spending given the considerable geopolitical risks,” Siluanov said today at his ministry’s annual meeting, referring to the Ukrainian crisis. “One-time injections of budget funds aren’t capable of setting the economy on a path of sustainable growth.”

Since the start of Russia’s slow-motion takeover of Crimea in March, its stock market has fallen sharply and the stability of the ruble has taken a massive hit. But according Paul Sullivan, professor of economics at the National Defense University, the sanctions aren’t fully responsible for the slowdown in Russia’s economy. “It is impossible to distinguish the effects of the US and EU sanctions from the effects of other factors that are important for the Russian economy, such as energy and other raw materials demands from China, which seems to be slowing down, and its generally stagnant markets in the EU, which takes in 70 percent of Russian energy exports,” Sullivan told ThinkProgress in an email.

Sullivan was also not impressed with the current sanctions regime, which he referred as “toothless” in their scope. “The effects of the US and EU sanctions are minor in comparison to what they could be if they were serious about sending strong signals to Moscow,” Sullivan continued. “The EU and Russia rely too much on each other to play chicken with each other. If they ever crashed in that game both would lose massively.” Sullivan noted that the United States targeting several major players in Russia in the previous round of sanctions hurts the targets, but called the damage to the Russian economy mostly self-inflicted.

“Russia is a poorly run economy. It is a corrupt mafiacracy, run by former and present intelligence leaders, oligarchs and sundry hangers on and pilot fish,” he said. “The situation in Ukraine will prove to be yet another self-inflicted wound by a country that is violently in search of itself and its future.”

Previously, President Obama signed an executive order granting the Treasury Secretary the ability to place sanctions on Russian “financial services, energy, metals and mining, engineering, and defense” industries. Closing Russia off from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, which enables transactions between international banks, and severely limiting financial and transport aspects of energy and other minerals trade would certainly hammer the Russian economy, Sullivan told ThinkProgress — if the U.S. and Europe prove willing to commit to such strong moves.

The White House doesn’t seem quite ready to pull the trigger on the sort of crippling sanctions that have been threatened against Moscow just yet, according to the New York Times. In an article published on Tuesday morning, the Times reported that President Obama “does not plan to place more crippling measures on whole sectors of the Russian economy unless the Kremlin escalates its actions. The White House wants to hold those sanctions in reserve should Moscow invade Ukraine or seek to annex its eastern regions.”

Should Moscow cause Washington to tip its hand, however, experts do believe that the U.S. does have the leverage needed to do real damage to the Russian economy. “Russia’s relationship to global financial markets — integrated, highly leveraged, and opaque — creates vulnerability, which sanctions could exploit to produce a Russian ‘Lehman moment,’” wrote Council on Foreign Relations fellow Robert Kahn in Foreign Affairs, referring to the collapse of Lehman Bros. financial firm in 2008. Such a moment would invoke “a sharp, rapid deleveraging with major consequences for Russia’s ability to trade and invest.”

“The West can mete out some degree of financial punishment without even explicitly sanctioning Russian banks,” Kahn argued. “Often underappreciated is the extent to which a simple tightening of know-your-customer and anti–money laundering rules can discourage Western financial institutions from taking on Russian clients. This would lead to the reduction of credit limits and the halting of joint projects.”

President Obama and Russian president Vladimir Putin spoke on the phone on Monday afternoon about the ongoing crisis, the fifth conversation between the two leaders in the last two months. “The President noted Russia’s growing political and economic isolation as a result of its actions in Ukraine and made clear that the costs Russia already has incurred will increase if those actions persist,” according to the White House readout of the call. Russian foreign minister Sergey Lavrov is also set to meet with his counterpart, Secretary of State John Kerry, over the crisis in Geneva on Thursday.

Meanwhile, the Ukrainian military began operations against the “pro-Russia militias” that are occupying government buildings, which itself caused the Russian stock market to dip sharply on Tuesday morning.

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