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Crimea Standoff Might Wreck Russian Economy

As the US and EU threaten to impose sanctions, Putin’s invasion of Crimea has already inflicted considerable economic damage in Russia.
Photo by Steven Weinberg

Russia’s takeover of Crimea has prompted the West to consider sanctions and other measures that would put pressure on the country’s leadership. Although the crisis has already inflicted considerable damage on its economy, Russia has suggested that it would respond with punitive measures of its own.

The White House announced Thursday that visa restrictions had been imposed on unnamed individuals “responsible for or complicit in threatening the sovereignty and territorial integrity of Ukraine. ” President Barack Obama also signed an Executive Order authorizing sanctions on people who are “undermining democratic processes or institutions in Ukraine.”

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Meanwhile, European leaders also threatened sanctions against Russia unless it withdrew from Crimea or engaged in legitimate negotiations.

The US visa restriction puts pressure on key members of Putin’s regime, while targeted and coordinated economic sanctions could cripple Russia’s key exports. But implementing the latter would prove difficult and costly for the United States, and especially for the European Union.

“US economic sanctions on Russia would have limited impact unless they were accompanied by similar European sanctions,” Dmitry Gorenburg, a senior analyst at CNA Strategic Studies, told VICE News. “The EU, and particularly Germany, has much closer economic ties to Russia.”

On Wednesday, US House speaker John Boehner called for increasing US exports of natural gas. What gives Vladimir Putin leverage over Europe, he said, is the fact that Russia exports a lot of their oil and gas to countries on which the US has to rely to coordinate sanctions.

The Russian stock market fell by 10.8 percent on the Monday following Russia’s weekend invasion, decreasing the value of listed companies by almost $60 billion. Russia’s central bank had to raise interest rates and spend a record $11.3 billion to mitigate damage the panic was inflicting on its currency, the ruble.

“In my career I’ve never seen such a dramatic hike, the consequences of which will be felt for much longer than any other event of that nature,” Slava Rabinovich, the CEO of Moscow-based Diamond Age Russia Fund, told VICE News.

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“The current situation, the wild swing in the equity risk premium, is a much more long-term phenomenon that will cost Russia dearly,” Rabinovich said.

If the conflict escalates, the uncertainty about Putin’s motives may lead more investors to flee Russia and move it further toward recession. Despite its vast natural resources, the pace of Russia’s economic growth slowed in 2013.

Earlier this week, Putin delivered an unusual acknowledgement of the impact of politics on financial markets. “Money loves peace and stability,” he said. “But I think this is temporary thing.”

Russian officials have also promised to retaliate against potential sanctions. "We will have to respond," Foreign Ministry spokesman Alexander Lukashevich said on Tuesday. "Unilateral sanctions do not fit the standards of civilized relations between states.” (Armed invasion on the other hand? Perfectly civilized.)

Lawmakers in Russia’s Federation Council are drafting legislation that would allow the government to confiscate property belonging to European and US companies if sanctions are imposed.

But Gorenburg thought that non-economic retaliation from Russia is more likely. He believes Russia could try to sell S-300 missiles to Iran or be more open about supplying weapons to Syria. “Another possibility, and the most worrisome, is that the response would be to do more to try to destabilize Ukraine,” he said.