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Russian Economy Weaker after Crimea

Alex Finkelstein

Western leaders increased pressure on Russia Monday, suspending the country’s membership at the G8 in response to Moscow’s annexation of Crimea. Diplomats also canceled an upcoming June summit in Sochi, relocating the G7 meeting to Brussels. Russian Foreign Minister Sergey Lavrov said the diplomatic restriction was not a big deal and another senior Kremlin advisor voiced similarly dismissive views over newly enacted economic sanctions.

Despite the tone from Russian officials, anecdotal evidence indicates the restrictions are impacting the behavior of Russian elites. Oil tycoon, Gennady Timchenko, had to sell his 43% ownership in Gunvor Group, a Geneva energy trading firm, hours after Washington decided to blacklist him from engaging in dollar transactions. Additionally, the German defense firm Rheinmetall, has suspended a $140 million dollar contract to build a training camp for Russian military forces.

Russia President Vladimir Putin talks to Vladislav Surkov, one of his closest advisors. (Photo: Getty)

Beyond sanctions, Russia’s relatively free financial markets are suffering from uncertainty following Crimea’s annexation. Moscow’s main stock exchange, MICEX, is down more than 12% this month. The exchange rate of the Russian ruble also declined 8.4% against the dollar since November, hurting the purchasing power of nearly all Russians. Analysts expect capital outflow to reach over $70 billion dollars this quarter alone, possibly pushing the economy into recession.

During his trip to Europe this week, President Obama pushed Europeans to intensify the sanctions, however, a number of countries are reluctant to take further action. Specifically, the UK, where there is a sizable diaspora of Russian elites living in London and storing their money in British banks. Other EU nations are also nervous about ramping up sanctions because they depend upon Russian hydrocarbons; Germany is one of largest consumers of Russian-supplied natural gas.

Meanwhile, the U.S. government has limited exposure to the Russian economy and could help export more natural gas to Europe. Recently, Department of Energy officials approved building a new facility in Oregon to liquefy and export natural gas, pending regulatory and environmental reviews. Though the terminal won’t allow the U.S. to fully replace Russian natural gas in Europe, such a measure could indicate Washington’s willingness to help Europe confront Putin’s aggression.