ETHNIC Russians constitute 58.5% of Crimea's population and voter turnout was 93% in the referendum to rejoin Russia. While being touted as a “historic” turnout by Russian news agencies, Putin's “victory” has been largely rejected by the West. Whether Russia will deploy forces on the ground to make that victory a reality is not the question of discussion here. The economic isolation of Russia has already begun. Indeed, the economy is showing signs of strain in the backdrop of the belligerent talk coming out of Moscow.
The European Union has condemned the referendum as lacking in legitimacy and there is now talk of punitive sanctions to make Russia pay, which include asset freezes and visa bans on individuals involved in the annexation of Crimea. There is evidence that big Russian companies are pulling out billions of dollars deposited in Western banks in the backdrop of any US sanctions over the Crimean dilemma. These include state-owned banks like Sberbank and VTB and Russian oil giant Lukoil.
Any sanctions targeting asset freeze will probably drive Russia to engage more heavily with China in “bilateral trade and ultimately to transact using either roubles or renminbi and bypass the dollar.” Though the nationalistic wave sweeping through Russia has helped President Putin's ratings, the economic and financial repercussions have already started with the first signs manifesting in the fall of the value of rouble and a sharp downturn in Russian stock market values. The pinch is being felt by big business in Russia. For instance, Mr. Alisher Usmanov, reputed to be Russia's richest person, is owner of the country's largest iron ore company Metalloinvest Holding Co and, according to Bloomburg, has lost $1.5 billion since the beginning of the crisis.
The strongest warning to President Putin on his Caspian adventure has come from Alexei Kudrin, who is a former finance minister and a member of the president's economic council. According to Mr. Kudrin, the economy could face capital outflows “as high as $50 billion a quarter and no economic growth, should western countries press forward with proposed sanctions against Moscow.” What it all boils down to is that Moscow could soon face a serious credit crunch as Western banks pull the plug on loans to the Russia. With Russian financial institutions unable to conduct any transactions with the West, it could “also slash 2014 gross domestic product growth to 0%, compared with the economy ministry's 2.5% forecast.”
Things certainly do not look good for many major Russian companies. According to Russian banks, some of Russia's biggest companies have had their projects stalled as potential lenders have capped lending choosing to “wait and see” what measures the West will take and the Russian answer to punitive measures. As stated earlier, the stock market has dropped substantially, losing more than 13% since March 3, and two of its largest state-owned banks, Sberbank and VTB, have “fallen 23.4% and 24.7% respectively.” Precisely what will happen in the event that these banks are targeted by sanctions? If the West is serious about sanctions, targeting these national institutions could serve a serious blow to the billions of dollars in credit that would result in grave repercussions for the Russian economy. Again, in the event that any western bank is disallowed by sanctions to form syndicate deals with Russian companies, the burden will inevitably fall on Russian state banks, which in turn will have to turn to the State to back them up with capital injections.
All in all, a pretty mess and one which Russia and the West for that matter could do without. As Russian interests pull out of the West, we see some US and European banks reciprocating the Russian move by reducing their exposure to their Slavic counterparts on jointly structured deals. On March 14, Barclays backtracked on a deal to co-fund and Essar Energy deal that was supposed to be co-financed by Russia's VTB bank. According to press reports, “bankers said risk managers at western lenders were anxious not to be left with sole responsibility for such deals in the event that sanctions barred Russian banks from continuing their role.” This is supported by data from Bank for International Settlements that has stated that American banks have been busy offloading Russian bonds. With US banks and asset managers' combined exposure to Russia worth $75 billion; we can only assume it's been a busy few weeks.
What is abundantly clear is that there are no winners if sanctions are imposed. Russia remains the third largest recipient of foreign investment capital following the US and China. British oil and gas giant BP has an 18.5% stake in Russian oil company Rosneft, which in turn purchased TNK-BP for $57 billion to become the largest oil company in the world. Indeed, EU will probably lose a lot more than the US if Russia reciprocates with sanctions of its own. Given the huge potential fallout over trade and finance, it would not be too surprising that ultimately economic factors and not military actions will determine the outcome of the Crimean crisis.
The writer is Assistant Editor, The Daily Star.