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Harsh Winter? How Sanctions are affecting Russia and the West

Chris Scott takes a look at the implications of the latest round of sanctions and how Russia is fighting back.

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Photo Credit: Bryan Jones
Photo Credit: Bryan Jones

As the crisis in Ukraine has unfolded over the past year, the EU and USA have increasingly looked to create disincentives for Russia to intervene in the region. These disincentives have largely taken the form of sanctions, initially targeted at individuals closely associated with Vladimir Putin and the Russian government. However following the crash of Malaysian Airline flight MH17 in rebel-held territory, allegedly the result of Ukrainian separatists shooting the plane down, these sanctions have increasingly been aimed at large sectors of the Russian economy.

Amongst the most significant measures are those restricting credit access on financial markets for Russia's financial institutions. Under proposals announced by the European Union on the 12th of September, Russia's largest banks will have limited access to European and American capital markets, and no longer be able to issue debt with maturity of more than 30 days. This will make investment more expensive for Russian companies, while making it more difficult and expensive for Russian companies to service their debt. As a result there is greater risk of capital flight from the country, since foreign investors and Russians alike look to remove financial assets from the country.

Russia will also find itself increasingly unable to import technological equipment from European countries. This will be mainly to the detriment of its oil industry, by making it more difficult for companies to import the technology and expertise required to exploit reserves in more remote locations such as the Arctic. At present Russia remains unable to replicate this technology for itself, leading to expectations of lower oil production in the future. This lower investment has reduced predictions of economic growth, with the IMF expecting the economy to only grow by 0.2% in 2014.

However sanctions imposed by Western countries are also leading to lower growth rates in European countries. For Europe in particular, who prior to the Ukrainian civil war had seen Russia as an important export market, the loss of trade is making recovery from the Euro crisis more difficult by reducing employment and economic growth. The uncertainty surrounding the crisis, and especially in relation to whether it could escalate further, is also damaging business confidence. This has even been felt in larger economies such as Germany, where the Ifo institute's business climate index, which measures the confidence German businesses have in the economy, fell from 108 in July to 106.3 in August.

Furthermore European nations are likely to see a further negative effect on their domestic industries, with Russia now talking of extending its own counter-sanctions to European clothing and car factories. This is part of a programme of import substitution by the Russian government, in which it seeks to reduce its reliance on imports and instead build up its own domestic industries. This follows its previous decision at the start of August to ban food imports from Europe, to the detriment of Eastern European countries in particular. In Poland, where 56% of its apple exports went to Russia, the Ministry of Agriculture believe that sanctions are likely to result in a loss of trade worth $659m to Polish farmers.

Thus far the effect of these sanctions on curtailing Russian involvement in Ukraine has been limited. Although Russian business leaders have expressed concerns at the long-term effects of the sanctions, they have so far done little to deter Russian president Vladimir Putin from continuing to support militia opposed to the Ukrainian government. However as sanctions begin to take hold and economic growth slows, their effects will be increasingly felt by the Russian population. Although Vladimir Putin has enjoyed high approval ratings for his handling of the crisis in Ukraine, this may change if as expected, food prices rise and living standards are squeezed. If public opinion did turn against Putin, it is likely to have a far greater effect than any condemnation from Western nations.

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