Are sanctions pushing Russia into a recession? (+video)

A new report by the International Monetary Fund suggests that Russia is on the verge of recession and could end up there if things get worse. Sanctions appear to be having an effect.

By , Staff writer

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    US Treasury Secretary Jack Lew testifies before the Senate Budget Committee in Washington in March. Mr. Lew told Congress this week that international sanctions on Russia were having an effect.
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The Russians filling tourist flights to the newly annexed Black Sea province of Crimea and the Muscovites reveling in a burst of spring just ahead of the long May Day holiday can almost be heard scoffing, “Sanctions? What sanctions?”

But the economic measures the United States and Europe have imposed on Russia – which hawks in Congress have called a “slap on the wrist” – are beginning to have an impact, according to the International Monetary Fund.

The sanctions approved so far are causing investors to pull their money out of Russia. Russia saw net capital outflows of more than $60 billion in the first quarter of 2014, and that figure is expected to rise to $100 billion over the year, the IMF says.

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Potentially pushing Russia into recession, says the IMF, is a sense of uncertainty about where the Ukraine crisis might lead and what additional sanctions might follow.

“What we have noticed is that fear of sanctions could be even more powerful than sanctions,” said Antonio Spilimbergo, the head of the IMF’s mission to Russia, at a Moscow briefing Wednesday.

Russia’s economic growth continues to slow and will eke out just a 0.2 percent gain this year, the IMF forecasted in its latest Russia report, down from the 1.3 percent growth it had projected earlier. Even that near-zero growth could prove to be optimistic if the Ukraine crisis deepens, the IMF says.

“Current projections are contingent on a gradual resolution of geopolitical tensions,” Mr. Spilimbergo said. “Continued conflict could lead to additional sanctions and deterioration of confidence that could reduce investment and growth further.”

The sanctions have come in response to Russia's annexation of Crimea and, more recently, its apparent orchestration of violent separatist movements across the eastern region of Ukraine.

Most Russians have been dismissive of the sanctions. After all, the measures are designed to hit a limited number of people – members of Russian President Vladimir Putin’s inner circle and key Russian officials who have a hand in or might profit from Russia’s actions in Ukraine. That doesn’t include the average Russian.

Russia’s stock market even rose this week after it became clear that the West was not yet prepared to impose sanctions on whole sectors of the Russian economy – like energy and finance – and that the European Union was unlikely to sanction Russian companies, as the US has.

The US on Monday announced a third round of Russia sanctions, which target additional individuals and companies primarily in the defense and high-technology areas. The EU followed Tuesday with its own new measures, but it stuck to targeting individuals, although EU officials cautioned that additional measures could be forthcoming.

In Washington, Treasury Secretary Jack Lew warned Tuesday that additional measures – including broad sanctions of economic sectors – could be imposed “if the policy of Russia doesn’t change.”

A group of 21 Republican senators on Wednesday introduced legislation it said was aimed at preventing further Russian aggression in Ukraine.

The legislation includes steps to strengthen NATO; additional support for non-NATO allies threatened by Russia (such as Ukraine, Moldova, and Georgia); and sanctions on four key Russian banks, Russia’s largest energy companies, and Rosoboronexport, the major Russian arms dealer.

Sen. Bob Corker (R) of Tennessee, one of the authors of the bill, said that only this level of punitive action would be able to “deter Russia.”

But there are signs that the Western measures are starting to get under the skin of the Russian leadership.

Putin, who gleefully responded to the first US move against a Russian bank by publicly opening an account there, is now sounding less triumphant. The Russian leader now acknowledges that sanctions are having an impact on the Russian economy, and he is also warning that Russia could impose countermeasures against foreign interests in Russia.

“The Russian government has already proposed some retaliatory steps,” Putin said at a Eurasian Economic Council summit in Minsk, Belarus, Tuesday. “If something like this [additional Western sanctions] continues, then of course we will have to consider who’s working and how in the Russian Federation, in the key sectors of the Russian economy, including energy.” 

Many international energy companies, including Exxon-Mobil and Royal Dutch Shell, have major investments and exploration projects in Russia.

Russian Foreign Minister Sergei Lavrov expressed irritation at this week’s measures, saying they were the work of “politicians who understand that their geopolitical ambitions have failed and … are attempting to blame others.”

One high official in Russia’s space program reminded the US that its astronauts reach the International Space Station (ISS) on Russian rockets.

“The United States introduced sanctions against our space industry, [and now] we will reply to statements with statements, to actions with actions,” Dmitry Rogozin, the deputy prime minister overseeing Russia’s defense industry, said on Twitter. “I propose that the United States delivers its astronauts to the ISS with the help of a trampoline.”

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