Economic cost of Crimea seizure mounts for Russia

Wednesday 26 March 2014 18.25
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World Bank warns of effect on Ukraine crisis on Russian economy
World Bank warns of effect on Ukraine crisis on Russian economy
Siemens chief Joe Kaeser meets Russian President Putin
Siemens chief Joe Kaeser meets Russian President Putin

The economic impact of annexing Crimea from Ukraine could drive Russia into a sharp recession this year even if the West stops short of trade sanctions, the World Bank has warned.

The gloomy assessment is far more negative than Russian government forecasts.

It came on a day when US President Barack Obama was meeting European Union and NATO leaders to discuss how to reduce Europe's dependence on Russian energy and bolster NATO defences of east European allies bordering Russia and Ukraine.

Obama and leaders of the Group of Seven major industrialised nations agreed this week to hold off on tougher economic sanctions unless President Vladimir Putin takes further action to destabilise Ukraine or other former Soviet republics.

Western concern has focused on Russian troops massed on Ukraine's eastern border amid Kremlin allegations of attacks on Russian speakers in that industrial region of the country.

But Polish Prime Minister Donald Tusk said on Wednesday it seemed likely that the firm Western response so far would stop Russia undertaking what he called "other acts of aggression and interference on the territory of Ukraine". 

A World Bank report on the Russian economy, compiled before the most recent evidence of the scale of capital flight, made clear Moscow was already set to pay a significant price in lost growth due to the most serious East-West confrontation since the end of the Cold War. 

Russia's gross domestic product (GDP) could contract by as much as 1.8% in 2014 if the crisis persists, it said. That high-risk forecast assumes that the international community would still refrain from trade sanctions.

"An intensification of political tension could lead to heightened uncertainties around economic sanctions and would further depress confidence and investment activities," the World Bank said.

"We assume that political risks will be prominent in the short-term."

Under a low-risk scenario, assuming only a short-lived impact from the crisis, GDP could grow by 1.1%, just half the bank's 2.2% growth forecast published in December.

Russia is refusing to recognise the Kiev government chosen by parliament after the overthrow of Moscow-backed President Viktor Yanukovich on February 22 after months of street protests against his refusal to sign a pact on closer ties with the EU.

So far, the US and the EU have imposed personal sanctions against Russian and Crimean officials involved in the seizure of the peninsula and Washington has imposed visa bans and asset freezes on senior business figures close to Putin.

Russian markets and the rouble have been shaken, resulting in massive capital outflows, now estimated by the Economy Ministry at up to $70 billion in the first quarter alone compared with $63 billion in the whole of last year.

However, Russian stocks clawed back more ground today and the rouble strengthened as a relief rally continued due to signs of an easing of tensions over the Crimea crisis.

Russian assets have rallied this week as investors calculate that the annexation of Crimea will not trigger more serious Western sanctions.

The Russian Economy Ministry has yet to revise its early 2014 growth forecast of 2.5% for the year but a deputy minister said earlier this week that it was anticipating GDP growth of "around zero" for the first quarter.

The European Union was set to press Obama at a summit in Brussels to help reduce Europe's reliance on Russian energy by exporting US natural gas and oil, restricted by US laws.

Russia provides around one third of the EU's oil and gas and some 40% of the gas is exported through Ukraine.

After visiting a World War One graveyard, Obama had just 75 minutes over lunch with the EU's top officials to tackle issues ranging from transatlantic trade negotiations to climate change.

The quest to reduce reliance on Russian oil and gas supplies has prompted the EU to accelerate efforts to develop its internal energy market and revisit alternative sources such as liquefied natural gas, nuclear energy and shale gas, although the latter options raise strong environmental concerns.

British Prime Minister David Cameron said yesterday that energy independence and the adoption of technologies like shale gas fracking should top Europe's political agenda, calling Crimea a "wake-up call" for states reliant on Russian gas.

He pointed to reserves of shale gas in southeastern Europe, Poland and England that could be extracted by the process of pumping liquids at high pressure into underground rock formations known as fracking, widespread in the US.

Environmentalists say fracking is a threat to the water table and can cause earthquakes and landslides. Countries such as France and Bulgaria have banned it and others such as Britain and Poland have faced anti-fracking protests.

Siemens plans long-term Russia investment - CEO

Meanwhile, the chief executive of Siemens told President Vladimir Putin today that the German industrial giant plans long-term investment in Russia.

This is a key sign of confidence in Russia's economy despite the outcry over its intervention in Crimea.

Siemens chief Joe Kaeser said at a meeting at Putin's Novo-Ogaryovo residence outside Moscow that his company "would put the emphasis on long-term cooperation in the sphere of investment", in comments translated into Russian by domestic news agencies.

"We will try to create beneficial conditions for our cooperation," said Putin, whose meeting with Kaeser came amid Western calls for tougher economic sanctions in response to Russia's takeover of Crimea.

Putin said that Siemens - which has been involved in several large projects in Russia including the Sapsan high speed Moscow-Saint Petersburg train - had been working in the country for 160 years.

"Just in the last two years, Siemens invested €750-800m, this is not a bad figure," Putin said. 

Kaeser, who earlier also met with the chief executive of state gas giant Gazprom Alexei Miller, did not directly refer to the Ukraine crisis but said the company had been through many challenges during the history of its work in Russia.

"During this long period of cooperation we have become convinced that it is possible to cope with experiences if we talk to each other and not about each other," he was quoted as saying.