As EU, US unveil biting new sanctions, Russia ready to soldier on

Though new Western sanctions on finance, energy, and other sectors will hinder Russia's long-term growth, economists say, the country will not suffer any short-term effects.

Russian Foreign Minister Sergei Lavrov speaks during a news conference in Moscow on Monday. Russia will not impose tit-for-tat measures over new Western sanctions, Mr. Lavrov said.

Moscow is bracing for a new round of sanctions from the European Union and the US, which for the first time will strike at key Russian businesses like finance, energy, and arms. Some Western commentary suggests that these measures will hit Russia hard, and possibly undermine President Vladimir Putin's power base.

But most Russian experts are not so sure.

They argue that the direct economic consequences will prove manageable – though the deeper effects of isolation for Russia, after two decades of integrating with the global economy, may be harder to predict. As for political impact, they say, if the goal of sanctions is to turn Russians against their hyper-popular president, or force Moscow to accept the Western agenda for Ukraine, a very long wait might be in store.

So far Russia's official response to the tough new measures is to warn the West that there will be painful blowback on US and European business interests for any harm done to Russia. The Kremlin is also insisting that the Western economic offensive will prompt Russians to rally round their leaders

But behind that public front, Russian business leaders acknowledge that the new sanctions will bite more deeply than the previous waves, which punished only selected individuals and companies. The new round "will obviously have a considerable adverse effect on GDP growth," says Andrei Klepach, deputy chairman of the state-owned external trade bank, Vneshekonombank.

Economists say the new sanctions will hurt Russian state banks and leading companies by blocking their access to Western capital markets. At the very least, that will drive up the cost of borrowing, make it difficult for them to roll over their debts – the Russian private sector owes over $700 billion to foreign investors – and to obtain financing for new projects. Last weekend, Russia's Central Bank raised its interest rate to a whopping 8 percent, a preemptive move designed to bolster the ruble, but one that will jack up costs throughout Russia's consumer economy.

No short-term impact?

However, many add, Western sources of cash are no longer the only show in town, and that Russia may turn to capital markets in Asia and the Persian Gulf.

"Russia has no short-term shortage of capital. It sits on big liquidity cushions," such as nearly half-a-trillion dollars in foreign reserves, and has vast reserves of natural resources, says Vladimir Osakovsky, a macroeconomist with the Bank of America-Merill Lynch in Moscow.

"In the longer term, there are alternative markets where capital can be raised. But Western sanctions will increase the difficulties, and hence the costs of doing so," he adds. "It will tell on long-range growth prospects."

Russian economists also say the government, which has maintained a balanced budget for many years, may step in by loosening its fiscal policies and introducing stimulus programs to keep Russians employed, and encourage more domestic business growth.

"I think we will see more policies that increase state investment, especially in infrastructure. It means that we'll run a budget deficit, but that's not necessarily tragic," says Alexei Vedev, an economist with the liberal Gaidar Institute in Moscow.

The other major way the sanctions will bite is by denying Russia access to sensitive and dual-use Western technologies, which are important for  Arctic oil-and-gas development and big infrastructure projects planned by the Russian government.

"Russia needs technology transfer, and this means from Western countries mainly," say Mr. Osakovsky. "There's no short-term impact. In the longer term it can determine growth, or no growth for Russia. But for now, our problems look quite manageable."

'Not worried'

Predictions of Mr. Putin's political demise may also be premature, experts say.

So far, the Russian public has barely noticed the sanctions threat. In early March, when sanctions were first imposed over Russia's annexation of Crimea, more than half of Russians admitted to being worried about it, while 40 percent said they weren't, says Alexei Grazhdankin, deputy director of the Levada Center in Moscow, Russia's only independent polling agency. By July, only 36 percent said they were worried, while 61 percent said they weren't.

"It seems that the development of events actually calmed people down. So far, the majority have only heard about sanctions from the media, which tends to take the optimistic line that it will only strengthen us," says Mr. Grazhdankin. "Still, a clear majority says that they are not worried."

Russian elites, who've grown used to doing business and parking their assets in the West, are agitated, say experts. But most may see little alternative to rallying around the Kremlin amid a wave of public patriotism.

"In some way the sanctions may play into Putin's hands, by forcing the richest Russians to bring their money home and show solidarity, or else lose their political influence and economic monopolies inside Russia," says Nikolai Petrov, a professor at the Higher School of Economics in Moscow.

But he adds that the vast ranks of the middle bureaucracy, who actually run Russia and have been pampered by Putin in recent years, are already being constrained by disciplinary measures – including travel bans imposed by the Kremlin on huge numbers of police and security personnel.

"Many mid-level officials have grown used to a certain lifestyle, and the Kremlin's preemptive measures aimed at insulating them from Western exposure are already crimping those lifestyles," he says. "It's a matter of having gotten used to vacations in Europe, sending their kids to school abroad, maybe buying a holiday property somewhere, and having it taken away."

Still, any serious rift in the upper ranks around Putin is hard to see at the moment.

"The population is being consolidated by these events," says Valery Mironov, deputy director of the Center for Development at Moscow's Higher School of Economics. "Russians always seem unite and work together in the face of a foreign threat. It's like we always have to be struggling against somebody to get things done."

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