Outside the Beltway

Invading Crimea Has Harmed Russia’s Economy

Doug Mataconis · Thursday, April 17, 2014 · 3 comments

The invasion of Crimea may have cost Russia a lot more than it expected:

MOSCOW — Russia’s economy has been hit hard by the turmoil in neighboring Ukraine, Kremlin officials said Wednesday, as pro-Russia separatists battled to take over more territory in Ukraine’s east — and potentially add to Moscow’s economic burden.

Russia’s annexation of Ukraine’s Crimea region last month and the instability it created in Russian financial markets were cited by government officials for record capital flight and sharply downgraded growth forecasts for the country. Finance Minister Anton Siluanov said that instead of projected 2.5% growth this year, Russia’s economy might show no growth at all.

Russia’s economic slide has accelerated since a rebellion in Ukraine ousted President Viktor Yanukovich, a Kremlin ally, in late February. Russian President Vladimir Putin then sent troops to Crimea, claiming that the ethnic Russian majority there was in danger from the opposition politicians who took power in Kiev, the Ukrainian capital.

U.S. and European sanctions to punish Russia for occupying and annexing Crimea have so far targeted only a few dozen officials and businessmen. But the prospect of broader penalties, such as a Western boycott of Russian oil and gas, have scared investors into cashing out their ruble-denominated assets for hard currency and taking their money abroad.

Russia’s foreign exchange reserves were drained of a record $63 billion in the first quarter of the year, Economic Development Minister Alexei Ulyukayev said Wednesday in an address to the lower house of the parliament.

If that pace continues, losses this year would surpass the $120 billion Russia lost in 2008 at the height of the global recession.

Russian stocks fell 10% last month, wiping out further billions in capital. The ruble has lost 9% of its value since the start of the year, boosting prices for the imported food and manufactured goods on which the Russian consumer market is heavily dependent.

“The acute international situation of the past two months” was the cause, Ulyukayev said, referring to the Ukraine unrest.

Kevin Drum estimates the losses so far at somewhere in the neighborhood of $200,000,000,000, which is a fairly sizable sum for an economy as weak as Russia’s already was prior to the increase in tensions in Eastern Europe. If the sanctions continue to have this impact, then Vladimir Putin may find himself in a very difficult decision. After all, it was the unsustainability of the economy that ultimately led to the collapse of the Soviet Union more than two decades ago. While the events in Russia may not be as severe this time around, it is by no means clear that Putin would be able to maintain internal support for his new hard line stance if Russian business interests start to feel the impact of the sanctions.