Sanctions on Russian economy will bark and bite

GMT 21:25 2014 Wednesday ,30 July

Arab Today, arab today Sanctions on Russian economy will bark and bite

A board listing foreign currency rates
Moscow - AFP

Moscow dismisses Western sanctions as mostly bark, but analysts warned the latest measures announced by the EU and US will also bite the Russian economy, which is teetering on the edge of recession.
Washington and Brussels announced on Tuesday the strongest sanctions on Russia since the Cold War over Moscow's annexation of Crimea and support for separatists in Ukraine.
The US prohibited three leading Russian banks from raising anything but short-term funding on US markets.
The EU also began imposing so-called sector sanctions, crimping access of Russian state-controlled banks to European capital markets.
It also banned future arms sales to Russia, restricted the export of goods with both defence and civilian applications, and clamped down on technology transfers, especially in the energy sector.
Russian officials have remained defiant, saying the sanctions would not sway policy.
"Talking to Russia in the language of sanctions is useless," Deputy Foreign Minister Grigory Karasin said in comments published in Kommersant broadsheet on Wednesday.
"Sanctions may help unite us, resulting in Russia having a stronger economy and a healthier society that no longer has any illusions."
The government has recently said it plans to raise its annual growth forecast from 0.5 to around 1.0 percent, but last week the International Monetary Fund slashed its estimate by 1.1 points to just 0.2 percent growth.
- 'Direct hit on economy' -
Analysts and businesses believe that the sanctions could begin to bite.
The Moscow-based Association of European Businesses said it "expects that these new sanctions will not only hurt the Russian economy," but will also hurt the European Union, which is struggling to maintain growth.
EU-Russia trade amounted to 326 billion euros ($437 billion) last year.
The Brussels-based EU Observer cited an EU source as saying the sanctions will hurt the Russian economy by 23 billion euros this year, or 1.5 percent of its gross domestic product, and by 75 billion euros or 4.8 percent of GDP next year -- enough to push the country into recession.
"This is more than serious, unlike the two previous sanctions packages, this is a direct hit on the country's economy as a whole," said Nikolai Petrov, a professor at Moscow's Higher School of Economics.
"The effects of this will be quickly felt by ordinary Russians," he told AFP.
So far sanctions have not been felt directly, although the ruble has slid by about 7.5 percent against the dollar since the start of the year, making imported goods more expensive.
A recent survey by the independent Levada polling centre found that 58 percent of Russians are not worried about the sanctions.
Igor Nikolayev, head of the FBK Strategic Analysis Institute, told AFP that effects of the sanctions would not be felt immediately, but only gradually.
- Sanctions squeeze cheap credit -
"Very important for the Russian economy is the halting or sharp reduction in the access to cheap credit," he said.
Not only state-controlled banks face higher borrowing costs, Russian companies could also have to pay higher rates if Western investors become wary of lending, crimping investment and economic activity.
Russian corporate debt stands at $700 billion, he said, and must be refinanced.
Analysts at London-based Capital Economics warned recently that the indirect impact of sanctions could be severe.
"Even if the direct impact of sanctions is limited, the indirect impact can be significant," chief emerging markets economist Neil Shearing said in a research note.
He said sanctions could spark another increase in capital flight from the country, deterring foreign and domestic investment "that is needed to restore Russia's economy vigour over the long-run".
Research director at the Higher School of Economics, former economy minister Yevgeniy Yasin, said on radio Echo of Moscow that restrictions on the import of cutting-edge technologies would harm the economy.
This could hit the energy sector particularly hard.
While the sanctions have been crafted to avoid disrupting sales of Russian gas and oil, which are of great importance to Europe and the global economy, Russia still needs massive investment and technology from Western companies to maintain output in the sector, which brings in two-thirds of export earnings.
Analysts said technology restrictions would in particular hurt development of new oil and gas fields in the Arctic.
"That is because on the Arctic shelf we are almost 100 percent dependent on imported technology and equipment," Sberbank CIB analyst Valery Nesterov was quoted as saying by RIA Novosti news agency.

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