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22 April 2014

What Putin Is Costing Russia

Former finance minister Alexi Kudrin projects up to $160 billion in capital will flee this year.

April 20, 2014 
Just how much is Vladimir Putin's Ukrainian adventure actually costing Russia? Quite a lot, it turns out.
New statistics from the Central Bank of Russia indicate that almost $51 billion in capital exited the country in the first quarter of 2014. The exodus, says financial website Quartz.com, is largely the result of investor jitters over Russia's intervention in Ukraine and subsequent annexation of Crimea.
As Quartz notes, this was the highest quarterly outflow of capital from the Russian Federation since the fourth quarter of 2008. While Russia can mitigate some of the damage because of its extensive foreign-currency reserves—estimated at more than $400 billion—the new Central Bank statistics signal that worse is still to come.

Russia's economic development ministry has downgraded the country's forecast to less than 1% growth this year; an earlier estimate had been 2.5%. The World Bank projects that the Russian economy could shrink nearly 2% in 2014. That would cost Russia in the neighborhood of $30 billion in lost economic output.

Meanwhile, the Russian government's bid to pressure Ukraine could end up backfiring. The state-controlled natural-gas giant, Gazprom, OGZPY -2.23% recently jacked up the price of gas to Ukraine by 80% and levied an $11.4 billion bill on Kiev for previously discounted energy sales. But observers say that the price hike could lead to a reduction in purchases as Kiev diversifies away from Russia toward friendlier European suppliers. This may already be happening. On April 9 the Ukrainian government retaliated by temporarily ceasing purchases of Russian gas, pending resolution of the pricing dispute.
Russian President Vladimir Putin discussing the country's economy, April 8. Getty Images
Moscow's international standing is becoming increasingly tenuous. Russia has already been ejected from the G-8 and its path to accession in the Organization for Economic Cooperation and Development has been halted, at least temporarily. In the latest development, the Parliamentary Assembly of the Council of Europe stripped Russia of its voting rights in protest over its interference in Ukraine.

Russia's annexation of Crimea is turning into a costly boondoggle. The Kremlin has already earmarked nearly $7 billion in economic aid for the peninsula this year, funds that will be spent on everything from infrastructure to beefed-up pensions for local residents. Even when balanced against anticipated gains from Crimea's energy resources and savings on naval basing arrangements, among other factors, that's a cost Russia's sluggish economy can ill afford.


The situation could become even more dire if Western economic pressure, which is still minimal, is ratcheted up. U.S. Secretary of State John Kerry has threatened additional sanctions against Moscow in response to its instigation of pro-Russian protests in the Ukrainian cities of Kharkiv, Donetsk and Luhansk. Such measures, Mr. Kerry has indicated, could include broad restrictions against Russia's energy, banking and mining. These sanctions could have significant, far-reaching effects on the country's long-term economic fortunes.

President Putin is currently riding a surge of popularity at home, propelled in no small measure by his assertive moves in Ukraine. When tallied in mid-March by state polling group VTsIOM, Mr. Putin's approval stood at nearly 72%, a gain of almost 10 percentage points from earlier in the year.
But the longer the crisis over Ukraine lasts, the higher the economic costs to Russia are likely to be. Former Finance Minister Alexei Kudrin, for example, has projected that Moscow's maneuvers in Ukraine could result in up to $160 billion in capital flight this year, and he concluded that the Russian economy will stagnate as a result.

Sometime in the not too distant future, it might become considerably more difficult for the Kremlin to continue to ignore the real-world price that is associated with its policies.
Mr. Berman is vice president of the American Foreign Policy Council in Washington, D.C.

http://online.wsj.com/news/articles/SB10001424052702303663604579503433988345564?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303663604579503433988345564.html

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