What has Russia Won in Crimea?

So far the answer appears to be not a lot – Russia is already suffering from limited political and more substantial economic consequences from its decision to annex Crimea, which will escalate sharply if there is any further action in Ukraine. The timing – during a period of economic malaise in Russia -exacerbates the impact on the economy.

Limited Political Consequences

The EU and USA have issued sanctions against Russia but the extent of these sanctions (so far) is limited and they are unlikely to have any real impact on the economy. Russia has also been suspended from the G8 – a symbolic move.

The more important political impact is in terms of Russia’s own relationship with Ukraine. Russia has been keen to avoid Ukraine joining the EU, so much so that it offered a bailout of US$15 billion and cheaper access to fuel. Ukraine will now be receiving assistance from the IMF and will almost definitely fall under the sphere of influence of the West.  An EU Association Agreement may be Kiev’s consolation prize for its loss of Crimea. This at a time when Russia has been negotiating the creation of the Eurasian Union – an EU-style trading and political bloc – amongst its neighbours.

It is true that Putin’s popularity at home has increased as a result of his action in Crimea, but this seems unlikely to last in the face of mounting economic problems.

More Significant Economic Costs

The fallout in economic terms is already beginning to crystallise. The stock market has fallen, the rouble has weakened against the dollar, interest rates have been raised and evidence of immense capital flight is building – Russia’s own Junior Economy Minister has signalled that capital outflows could reach US$70 billion in Q1 2014 alone – more than the whole of 2013. On the plus side, Russia’s large foreign reserves offer some protection and the value of its energy exports will be boosted by a weak rouble.

Daily Exchange Rate: 01/01/2014 – 25/03/2014

SB Russia exchange rate

Source: Oanda

Russian exports totalled US$523 billion in 2013, 60% of which were mineral fuels. The EU is Russia’s biggest trade partner, accounting for 53% of its exports – the majority of which are mineral fuels. The US is already being mooted as an alternative future supplier of gas to Europe – this would require the easing of restrictions on gas exports in the US however and is likely to be a medium-term option, along with increasing diversification through the Trans Adriatic Pipeline from Azerbaijan to Italy. In the short-term, a mild winter in Europe (which means storage levels are higher than usual) and the onset of spring lessens the impact of any potential supply problems from Russia – although that’s not to say there would not be consequences for the EU. However, trade works both ways and Russia needs its customers as much as its customers need Russian fuel. According to the IMF, in 2013 general government oil revenues accounted for an estimated 10.3% of Russian GDP. This figure was already in decline before Crimea, due to weak investment in the sector. Russia can’t afford steeper falls in revenue.

What Next?

If Russia enters Eastern or Southern Ukraine then international action and political and economic flow-on effects would escalate sharply, which in turn would strangle the already weak Russian economy. The likely next flashpoint will be Ukraine’s Presidential election in May – a time when the current leadership will face even greater challenges and when decision time for Ukraine’s future – facing West towards the EU or East towards Russia will be the principal issue directing both the future of Ukraine and the chances of any further Russian action in the East or South of the country.