Russian Economy Reeling after New Western Sanctions

A new wave of Western sanctions is hitting Russia’s economy hard. State-owned energy firms continue to bleed profits and Russia’s national currency plunged to a new low this week after the U.S. and the European Union announced new sanctions to punish Russia’s aggressive stance in eastern Ukraine. The sanctions could also prove costly for European and American companies.

While some worry the country’s weak currency will fuel higher prices, others say Russian consumers, who tend to buy few imports, are not likely to feel the impact yet.

“They affect state enterprises, state companies; they affect banks; they now affect a broad number of individuals, but less so, much less so – rank and file Russians,” said Maria Lipman, a political analyst at the Moscow Carnegie Center.

Russia’s central bank says it is prepared to act quickly if inflationary pressures grow, but experts predict the economic hemorrhage will continue. Hardest hit will be state-owned energy firms. Among them is Gazprom, which recently posted a 41 percent decline in net profits. Energy analyst Alexei Kokin blames the decline on Russia’s decision to stop natural gas sales to Ukraine.

“Basically the loss of Ukraine isn’t just a minor footnote, it’s a source of both uncertainty and potentially, basically, irreversible problems for Gazprom,” said Kokin.

Depressed oil prices have only compounded the problem – further hastening the ruble’s decline. Lipman said it’s a worrisome trend for Western companies that do business in Russia.

“Including the largest world companies such as Exxon or BP that are not at all happy; should not be happy, about sanctions being imposed and interfering with their lucrative cooperation with Russian oil industry,” said Lipman.

Besides targeting major companies and individuals with close ties to the Russian government, the new sanctions extend the ban on Russian exports and bar all future arms deals between Russia and Europe. Even if the West decides to roll back some of the sanctions, Marshall Gittler at online trading giant Global FX Strategy is warning investors to stay away.

“I think the economic fundamentals for the ruble are negative anyway. The question is the pace of decline. If Ukraine stabilizes, the ruble will probably decline at a much slower pace. Obviously if Ukraine heats up again, then pow! It’s collapse,” said Gittler.

Despite the damage to Russia’s economy, public support for Russian leader Vladimir Putin remains high. Few expect Putin to back down in the face of new sanctions. But whether Russia chooses to retaliate by suspending energy exports to Europe or banning Western planes from Russian airspace as some in Moscow have suggested — the end result is greater uncertainty, not just for Russia’s economy but for the world’s. 

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