Ukraine crisis takes a bite out of Russian, German economies

July 25, 2014, 2:23 PM UTC
Russian President Vladimir Putin
Russia's President Vladimir Putin attends a meeting in the Volga River region of Samara, on July 21, 2014. US President Barack Obama said yesterday that Putin must prove "that he supports a full and fair investigation" of the Malaysian plane disaster. AFP PHOTO / RIA-NOVOSTI / POOL/ ALEXEI NIKOLSKY (Photo credit should read ALEXEI NIKOLSKY/AFP/Getty Images)
Alexei Nikolsky—AFP/Getty

Forget sanctions – the Invisible Hand of market forces is already coming down hard on Vladimir Putin–and, for better or worse–his trading partners in Europe.

The Central Bank of Russia Friday raised interest rates to shore up confidence in the ruble in the latest sign that the five-month crisis is sapping confidence both among business and the population at large.

That’s a surprise because not only has the Russian economy barely grown all year–the government’s own forecast is for 0.5% growth in 2014– but also because it had seemed in the last couple of weeks that money wasn’t leaving the country as fast as it had done in the immediate aftermath of the annexation of Crimea in March.

“Inflationary risks have risen, in part due to geopolitical tensions and its possible influence on the national currency,” the CBR said after a regular board meeting, in a frank admission of the economy’s vulnerability.

Inflation was running at 7.5% in the first half of the year, well above the central bank’s target of 5%, not helped by the fact Russia is restricting cheap food imports from Ukraine to put economic pressure on the country.

The CBR said investment activity would stay weak due to falling corporate profits and to “limited access to long-term financial resources on international and domestic markets.”

The flip side of that coin is that the German economy, which has done spectacularly well out of selling investment goods to Russia over recent years, is also struggling now. German exports to Russia were already down 17% on the year in April, and on Friday, the closely-watched Ifo business sentiment index fell to its lowest level in nine months.

“Geopolitical tensions are taking their toll on the German economy,” said Ifo head Hans-Werner Sinn.

German business interests have been one of the biggest factors holding back the European response to Russia’s destabilisation of Ukraine all year, but there have been increasing signs of resignation to tougher sanctions in the wake of the apparent shooting down of a Malaysian airliner last week, killing 298 (including four Germans).

“If the price has to be paid, then we’ll pay it,” Eckhard Cordes, chief executive of German retailer Metro AG and head of the ‘Ausschuss Ost ‘ business lobby that promotes German-Russian trade, said in an article in the newspaper Handelsblatt Thursday.

The E.U. has been slow to match U.S. efforts to “impose costs” on Russia for fomenting the conflict in Ukraine, with countries such as Germany, France and the U.K. bickering over how to spread the pain around their own economies.

However, a meeting of E.U. ambassadors in Brussels Friday did sign off on slapping asset freezes and visa bans on another 15 people and 18 companies “responsible for action against Ukraine’s territorial integrity.”

The ambassadors also struck a preliminary deal on expanding sanctions next week, which Reuters reported would include restrictions on Russian access to European financial markets, defence and energy technology and equipment useful for both defence or civilian purposes.

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