Russia’s Economy at Risk of Delayed Recovery After Crimea Flareup

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(Bloomberg – – Andre Tartar, Anna Andrianova – August 28, 2016)

The recent flare up over Crimea may have just delayed Russia’s economic recovery.

After President Vladimir Putin accused Ukraine of plotting terrorist attacks on the Black Sea peninsula this month, the chance that Western countries will scrap economic sanctions against Russia has declined, according to a Bloomberg survey of economists. Of the 21 asked, 52 percent see the European Union beginning to lift its penalties in the next 12 months. That’s down from 69 percent in the previous survey. Only 10 percent expect the U.S. to start removing its sanctions, down from 19 percent a month ago.

“Increasing Ukraine tensions will undermine investor confidence, keep EU and U.S. sanctions in place and further put off foreign capital flows, as Putin will not be focused on economic reforms,” said Christopher Shiells, a senior analyst at Informa Global Markets. “This will weaken the ruble and force the central bank to adopt a more cautious, hawkish tone.”

The sanctions imposed after Russia annexed Crimea in 2014 have compounded pain from a drop in oil prices, triggering capital outflows and a plunge in the ruble. With oil now near $50, the government is running its widest budget deficit since 2010 and forecasts the economy to growth less than 1 percent next year. The central bank kept the key rate unchanged last month at 10.5 percent after a June cut that ended nearly a year holding pat.

The ruble has gained more than 13 percent against the dollar this year, the second best performer among emerging-market currencies tracked by Bloomberg, after the Brazilian real. Still, the gains have yet to erase last year’s 20 percent loss.

Tensions between Russia and Ukraine escalated this month when Putin accused the government of staging attacks that killed two servicemen in Crimea. Ukraine said the incident never happened, while both sides bolstered their forces manning the frontier along the peninsula.

German Chancellor Angela Merkel has said it’s not possible to ease sanctions now, as Russia hasn’t shown progress on meeting the terms of a 2015 truce accord aimed at stopping fighting between pro-Moscow separatists and Ukrainian troops in that country’s easternmost regions.

This escalation over Crimea will affect investor confidence, according to 76 percent of the economists. It will also intensify capital outflows, 62 percent said.

“Given the prolongation of EU sanctions into early 2017 and recent hawkish statements by German Chancellor Merkel, we see only a small chance of sanctions easing in a one-year horizon,” said Andreas Schwabe, an economist at Raiffeisen Bank International AG in Vienna. “Moreover, for any easing of the Western sanctions, we see the requirement of Russia showing some flexibility in its position, which is currently not the case.”

Reducing the penalties will have a positive impact on Russia’s economy but the benefit will depend on the scope of any action by the EU or U.S., according to Sergey Narkevich, an analyst at Moscow-based Promsvyazbank PJSC.

“If it is the result of reduced military tensions and a general improvement in relations between Russia and Western countries, the effect would be substantial,” he said. “If it is an uncoordinated action by just some of the European countries, the influence would be much less material.”

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