Ukraine faceoff dents Russian economy
Just days after Russia's occupation of the Crimea region in Ukraine, Moscow is having to move quickly to stem disturbance in its own economy. This could strengthen the hand of those in the West pushing for economic sanctions against Russia.
Russia's central bank on Monday raised its benchmark interest rate sharply, from 5.5 percent to 8 percent, in response to a plunge in the nation's currency and stock market. Russia's economic ministry said the rate hike is aimed at shoring up the ruble's value, which has dropped rapidly as Russian investors exchanged the currency for the comparable safety of dollars. Russia's Micex stock index dropped 12 percent, it's largest decline since 2008.
"Escalation of geopolitical risks related to the Russian Parliament's legitimization of military incursion into Ukrainian territory and intensified selling pressure on the ruble over the weekend became a convincing argument for the [Bank of Russia] to step in with an urgent rate hike," wrote analysts with Societe Generale.
"There are a broad array of options that are available, not just to the United States, but to our allies," he added. There are visa bans, there are asset freezes, there's isolation with respect to trade and investment."
In the short term, such moves would likely have little impact on the U.S., which did only $38 billion in direct trade with Russia in 2013. But the risks for Europe are greater.
With tensions in Ukraine rising, the biggest threat for both Europe and Russia concerns energy. The EU imports 31 percent of its natural gas, 27 percent of its crude oil and 24 percent of its coal from Russia. More than 20 percent of the natural gas Russia exports to the EU also passes through Ukraine. On the other side, Russia derives more than half of its revenue from energy exports.
"Disruption to energy trade would be in neither side's interest, especially Russia's as it would simply encourage EU customers to seek more secure supplies elsewhere," said Julian Jessop, chief global economist with Capital Economics in a client note. "We suspect that any Western sanctions will only target individuals and political and cultural links, rather than trade."
