Russia Politics


Western countries step up sanctions on Russia

The United States and the European Union stepped up their sanctions on Russia on 29 April, claiming that the Putin administration is ignoring the 17 April Geneva agreement, which sought to deescalate tensions in eastern Ukraine. Rather than introducing new sanctions, the 29 April measures broaden the circle of individuals and companies that were targeted in the first round of sanctions in March. The U.S. added to the sanctions list 17 companies and seven Russians who are considered to be close to the Putin administration, while the European Union extended its sanctions list from 33 to 48 people. In addition, the credit card ban that Visa and MasterCard imposed upon two banks in March was extended to an additional two banks. However, these financial sanctions are not expected to have a strong impact on the Russian economy. Jacob Nell and Alina Slyusarchuk, economists at Morgan Stanley, point out that:

Russia appears to have an adequate supply of USD to meet its external financing needs for the next couple of years. So, we are skeptical that financial sanctions will force a change in Russia's behavior for this period. However, further sanctions would be disruptive for sanctioned entities, and could more broadly raise the cost of finance and reduce potential growth.

Russia's crucial energy sector was spared from direct sanctions. The West is concerned that such a step would cripple Europe's fragile economic recovery as the region depends on Russia for about a third of its oil and gas supply. While there is fervent political debate over whether the sanctions are effective, economists are largely in agreement regarding the downside effect of the measures on the Russian economy. In particular, the threat of extending the scope of the sanctions is affecting investor sentiment, which is likely to curb foreign investment.

Russian consumers and businesses are also taking flight and are rushing to convert their ruble funds into dollars. In the first three months of the year, net capital outflows reached USD 63.8 billion according to revised figures from the Russian Central Bank, which is already larger than the USD 59.7 billion outflows registered in the full year 2013. Both the Russian Ministry of Economy and the IMF expect capital outflows to reach USD 100 billion this year, whereas the World Bank sees capital outflows surging to USD 150 billion. The capital outflow is overshadowing the economic outlook. In particular, investment is likely to slide, as companies will also have to cope with the recent interest rate hike the Russian Central Bank imposed in an effort to stave off the weakening of the Russian ruble at its 25 April meeting (see below for details).

FocusEconomics Consensus Forecast panelists see gross fixed investment declining by 1.2% this year, which is down 0.5 percentage points over last month's forecast.

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