Russian economy, tycoons take hit in Crimea crisis

Associated Press
The head of the Russian Union of Industrialists and Entrepreneurs Alexander Shokhin, left, listens as Russia's President Vladimir Putin speaks at a congress of the Russian Union of Industrialists and Entrepreneurs in Moscow, Russia, on Thursday, March 20, 2014. (AP Photo/ Sergei Chirikov, pool)
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MOSCOW (AP) — Russia's most powerful businessmen waited for over an hour Thursday to hear from President Vladimir Putin, whose decision to annex the Crimean Peninsula has cost their companies hundreds of millions of dollars in market value.

When Putin finally showed up, he spoke to them for five minutes — and gave them no reassurances that they or their companies will get any respite from the uncertainty created by the takeover of a piece of land of little value to them beyond national pride.

Russia's economy has been pinched by the crisis over Crimea, even before the new sanctions the U.S. and Europe announced Thursday.

The Russian stock market has tanked 10 percent this month, wiping out billions in market capitalization. Economists have slashed growth forecasts to zero this year and foreign investors have been pulling money out of Russian banks. The Standard & Poor's ratings agency on Thursday cited all these issues when it cut its outlook for the country.

Because U.S. and European leaders have said they are willing to impose ever stiffer sanctions, ratcheting up the pressure on Russia step by step, the concern is how severe the penalties might get.

"The main risk is in the sanctions that have not been announced," says Nataliya Orlova, chief economist at Alfa Bank in Moscow. "It's hard to estimate the effect right now because we don't know what they will be."

On Thursday, the U.S. slapped asset freezes on four businessmen linked closely to Putin as well as on a Russian bank that provides them support. If Putin does not back down over Crimea, as most expect, those sanctions could broaden further in coming weeks.

Russia's economy was already weak going into the crisis, expanding only 1.3 percent last year. For this year, forecasts for growth of about 2 percent have been written off altogether, with Putin's adviser Alexei Kudrin expecting no growth at all.

The ruble has lost 9 percent against the dollar in less than three months. That will make imports more expensive for average Russians. In a bid to support the currency, the central bank raised its main interest rate sharply last week from 5.5 to 7 percent, but that will hurt the economy, too, by making loans more expensive.

Investors took $35 billion out of Russia in January and February — about half as much as in the entire preceding year. The outflows could soar to $50 billion per quarter if sanctions get tougher, Kudrin has warned.

The big risk for Russia is if the U.S. and Europe expand their sanctions to more aggressively target trade relations. That would be a last resort, at least for Europe, which has a lot to lose itself: It imports a third of its gas from Russian and has strong trades ties.

But even if outright trade embargoes are avoided, the risk of possible sanctions is itself damaging. Investing or lending in Russia will carry higher risks, investment decisions will be delayed and investors will feel inclined to keep on selling stocks, says Charlie Robertson, an analyst at Renaissance Capital in London.

At least publicly, Russian tycoons are keeping a low profile.

At the business group meeting chaired by Putin on Thursday, Alexei Mordashov, worth around $13 billion, and Dmitry Pumpyansky, worth $2 billion, did not utter a word of concern or complaint — even though their companies have been getting slammed in the stock markets.

Shares in Mordashov's Severstal, Russia's largest steel company, dropped 13 percent this month, cutting the company's capitalization by about $900 million. Stocks in Pumpyansky's pipe producer TMK lost 19 percent this month, with the company losing more than $500 million of its market value.

The tycoons' silence stems from a deal they struck with Putin more than a decade ago to give up any political ambitions in exchange for a free hand in their business affairs. Since the arrest and imprisonment of businessman Mikhail Khodorkovsky in 2003, no billionaire has ventured to question Putin's fundamental policies.

Metals tycoon Vladimir Potanin, who is believed to be worth $14 billion, says he'd "thought a long time ago about what we're going to do in case some sort of sanctions are introduced."

He says his companies, which include Norilsk Nickel, are using "multiple currencies" to diversify risk. Potanin, however, insists that neither he nor his partners expect sanctions to get so tough that they would hurt trade.

Nikolai Nikolayev, who owns a consulting business as well as hotels on Russia's Black Sea coast, dismissed the fears of wide-ranging trade embargoes.

European companies exported 123 billion ($170 billion) to Russia in 2012. So if they were told to curb or stop their exports to Russia, they would suffer hugely, Nikolayev said.

"These companies will get gaping holes in their sales," said Nikolayev. "Who is going to suffer more here?"

Independent economists say Russia in fact has more to lose economically from a tit-for-tat campaign of sanctions, mainly because European and U.S. companies have strong trade ties with other regions as well, such as Asia and Latin America.

But they say it is hard to imagine that Russia could get hit with crippling economic sanctions like North Korea or Iran just because its economy is so much more intertwined with that of the West.

Russia is the world's largest energy exporter, accounting for a third of Europe's consumption, according to oil company BP. It is also the world's largest exporter of industrial metals, making exports from companies like Severstal crucial for global producers whether they are making cars or airplanes.

"The world could afford to lose a million barrels of Iranian oil," Robertson said, referring to sanctions against Iran in 1979. "With Europe already upset that their energy costs are higher than the U.S., (it's) hard to see Europe getting more serious here."

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