CNBC Comment: Russia’s economy looks set up for a fall
DECADES of diplomacy ushered Moscow into the international tent. And in the interest of keeping the country inside, Western powers mostly seemed content to ignore Russian aggression across its borders and human rights violations within.
But this not-so-Great Game of diplomacy only works when all sides are prepared to at least preserve the façade. Closer economic ties should, theoretically, mean that everyone is motivated to stay friendly, or at least polite. Yet recent events in Ukraine show that Russia is not overly concerned about whether or not it falls out with Europe, by far its biggest trading partner.
Now Russia has stabbed at its perceived enemy in the form of the new pro-European regime in Ukraine. But like Hamlet, it may be surprised by the body in the arras when it rips aside the curtain. Russia’s economic success could be the real victim, even if military conflict with Western powers doesn’t ensue.
If oil and gas prices are bolstered by the threat to supply, this would obviously help Russia’s natural resource-driven economy, while simultaneously harming Europe’s still-fragile economic recovery. But this would be far outweighed by a series of negatives for the country.
The plunge in the value of the rouble – already the worst-performing emerging markets currency this year apart from the Argentine peso – could continue, as foreign investors pull out. Russia would have to defend the value of its currency further, probably through the central bank buying up rouble to bolster prices at potentially huge expense. The bank may also raise interest rates even higher than Monday’s emergency hike from 5.5 to 7 per cent, which could further hamper the economy.
The consequence would be that Russia’s economic growth, forecast by the World Bank to pick up to 3.1 per cent this year, would slow. The country could even fall into recession.
Further, some of Russia’s elite have amassed eye-watering fortunes in the years since the Iron Curtain fell, and ten of the world’s 100 richest people are from Russia, according to the latest Forbes Billionaires list.
The country’s super-wealthy, many of whom are close to President Putin, could be targeted by economic sanctions such as asset freezes. Plenty have bought property in European cities like London, put their money into banks outside Russia, or educated their children in the West. They are unlikely to be pleased with Putin if his actions lead to their comforts and wealth being threatened.
There is plenty of debate over the use of sanctions as a weapon. But they can be effective. You only have to look at Iran’s recent tentative steps into the international arena to see why.
Catherine Boyle is a writer and on-air correspondent for CNBC. @cboylecnbc.