Putin Takes Economic Gamble with Crimea Swoop

Sunday, 09 Mar 2014 07:29 AM

 

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Russia is facing a prolonged period of low growth due to a failure to implement reform, is suffering from disturbing capital flight and the ruble is coming under sustained market pressure.

So is it really the best time for President Vladimir Putin to launch an audacious bid to incorporate the Ukrainian region of Crimea into Russia within a matter of weeks?

Economists say that the swoop on Crimea carries huge economic risks for Putin, who faces retaliation from the West, increased pressure on the already-embattled ruble and yet more haemorrhaging of foreign capital from jittery investors.

The Russian strongman, who has not ruled out standing for re-election in 2018, has clearly put the political gain of grabbing Crimea before the short-term health of the Russian economy in the hope the damage will not be lasting.

But economists say such logic may be flawed and Russia's economic performance going forward will in any case make a mockery of its status as a member of the BRICS group of top emerging markets along with Brazil, India, China and South Africa.

 

 

"The crisis in Ukraine has increased the risks to Russia's already weakening economy presented by currency depreciation and capital flight," analysts at ratings agency Fitch said.

"Capital flight could accelerate, particularly if the threat of economic and financial sanctions increased."

Russia's growth was a measly 1.3 percent in 2013, with its economy suffering from a longstanding failure to implement reforms needed to wean it off an addiction to oil and gas income.

According to the economy ministry, private sector capital outflows have already reached $17 billion so far this year alone.

These factors and general nerves over emerging markets have put the ruble under sustained pressure.

But on Monday it suffered an all out assault, falling to record lows in value against the dollar and euro after Putin won approval from parliament for a de-facto invasion of Ukraine.

In that single day, the central bank spent over $11 billion propping up its currency, some five times more than any other intervention by the Russian central bank in its history.

"Capital flight, uncertainty and the higher interest rates needed to support the ruble will take their toll on Russia," said economists at Berenberg Bank in London, cutting their growth forecast for Russia to zero in 2014.

"Like the Soviet Union in the 1980s, Russia cannot afford a cold war," they said.

It said while other top emerging markets were taking measures to reform, "Russia is in effect ejecting itself from the BRICS."

 

 

Taken aback by the swiftness of Putin's reaction to Ukraine's turmoil, the West is planning retaliation but the Kremlin chief may be calculating that the bark is worse than the bite.

The EU is beset by divisions, with nations like Germany, Netherlands and Italy -- which have the most economic interests in Russia -- said to be opposing the toughest action. Former Soviet states like Lithuania are much more hawkish.

Europe imports one third of its gas from Russia and Moscow needs the hard currency from the energy sales for its own budget so sheer self-interest could block the most extreme scenarios.

But Russia's gas champion Gazprom upped the stakes in Friday by threating Ukraine with a repeat of the 2009 crisis over unpaid gas debts which saw much of Europe deprived of Russian gas supplies.

"Russia's bet on using the gas weapon is working," said daily business newspaper Vedomosti.

Analysts at Citi said: "Despite sharp criticism of the Russian move, there is clearly no appetite in Europe or the US for either a military confrontation with Moscow or meaningful economic sanctions."

 

 

The risk for Russia, at least on the currency markets, is cushioned by the fact the central bank still has immense forex reserves -- which stood at $493.4 billion on February 21.

The Russian central bank is run by Elvira Nabiullina, a former economy minister who commands respect in the markets.

The same could not be said however of Kremlin economic aide Sergei Glazyev whose apocalyptic view of global economics as a fight to the death between Russia and the West causes alarm.

He blithely warned this week that Russia would "reduce to zero" its economic dependence on the United States and emerge the stronger for it.

But the Vedomosti warned that the crisis would only make Europe more determined to look for other sources of gas, especially with the United States thinking of exporting LNG for the first time.

"In the mid-term it is going to be a task for Europe to reduce its dependence on Russian gas," it said. "But for now it has nothing to replace Gazprom with."

 

© AFP 2014

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