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Mil Arcega

March 25,2014

The World Bank warned Wednesday that Russia's economy could contract by 1.8 percent this year if the Ukraine crisis drags on. Although Russian leaders have downplayed the effects of recent U.S. and European sanctions, economists say capital already is pouring out of the country as risk-averse investors seek safer returns. Russia’s economy is barely growing now, and there increasing signs there are signs of more pain to come if international outrage and economic sanctions intensify.

Although Russian leaders have downplayed the impact of recent U.S. and European sanctions, analysts say capital has been pouring out of the country as risk-averse investors seek safer returns.

With Russia’s economy barely growing, some warn the country could slip into a recession as international outrage and economic sanctions intensify.

Russia is the world’s ninth largest economy, last year it expanded by a tepid 1.3 percent. But this year, Russia’s economy will be lucky to grow at all. Russian stocks have tumbled nearly 14 percent this year, the ruble has fallen 11 percent against the dollar, and inflation is likely to top 7 percent in March.

The economic weakness combined with the threat of more sanctions was enough to prompt the Standard and Poor's ratings agency to revise its outlook from "stable" to "negative."

Bank Rossiya in St. Petersburg, one of two Russian banks on the U.S. Treasury's sanctions list, March 21, 2014.

"The poor investment climate and investor sentiment has already extracted a price," said John Chambers, chairman of S&P’s sovereign ratings committee, "and that contributed to our lowering our growth forecast for this year and next and assigning the negative outlook because we didn’t think the risks to the rating were any longer balanced.

Investors have pulled about $70 billion from Russia’s economy since the crisis began. German Gref, the head of Russia’s state-owned Sberbank, warns the country could slip into recession if the trend continues.

“Everything depends on what scenario we will see, on how the situation develops," Gref said. "If capital outflows reach $100 billion, the economic growth will likely hit zero.”

But Russia is not entirely helpless. Its central bank has enough capacity to absorb a greater exodus of capital. It could also fight back by shutting off gas exports to Europe, which relies on Russia for about a third of its energy needs.

Bankrate.com’s Mark Hamrick says that fact is not lost on the European Union.

“It’s the question of unintended consequences of an escalating crisis," he said. "And so what happens if Russia starts taking steps? Then we re-escalate our response, and then the issue of fuel being supplied to Europe becomes a question mark.”

If that happens, the economic pain could spread around the globe. But it would also hurt Russia, which receives more than 50 percent of its revenues from energy exports.

One way to know if the sanctions are succeeding is when average citizens start feeling the pain, says Boston University professor Igor Lukes.

“I think what has to happen is that the sanctions have to have an impact on the overall standard of living in the country," Lukes said, "which then causes a decline in the current enthusiasm of the Russian public for Mr. Putin.”

That may be happening already. Prices for food and imported items are surging and some Muscovites have reported problems accessing funds at banks targeted by U.S. and European sanctions.