Sanctions over Crimea push Russia toward recession

Russia may be heading toward a recession as sanctions imposed by the U.S., European Union and Canada over the country's annexation of Crimea intensify.

Sanctions have targeted individuals and some banks

A stock price index graph shows plunging stock prices on an electronic information screen at the headquarters of the Micex-RTS Moscow Exchange, Russia's benchmark stock index. Russia may be entering a recession as uncertainty over sanctions hits markets, foreign investment and domestic demand. (Andrey Rudakov/Bloomberg)

Russia may be heading toward a recession as sanctions imposed by the U.S., European Union and Canada over the country's annexation of Crimea intensify.

According to a report by Russian state-owned bank VTB Capital, the country's economy will shrink over the next two quarters as uncertainty hurts domestic spending, hits markets, and puts a damper on foreign investment.

"Faced with heightened uncertainty, firms are delaying investment and hiring, while households choose to postpone discretionary spending," analysts Vladimir Kolychev and Daria Isakova wrote in the March edition of the bank's Russian Economy Monthly report.

They are lowering their outlook for economic growth in Russia to zero per cent for this year, and say the world's 9th largest economy could shrink further if sanctions worsen or uncertainty remains high.

On Friday, Russian President Vladimir Putin formally annexed Crimea, deepening the divide between his country and the European Union, which has stood behind Ukraine.

Russian markets suffer

Since the crisis in Crimea began, Russian markets have borne some of the pain for Putin's Crimean ambitions.

Russia's Micex stock index has dropped 13.2 per cent so far this year, compared to a 5.7 per cent drop for the MSCI Emerging Market Index, which is a broad measure of market movement in emerging markets around the world.

The ruble has dropped 8.9 per cent so far this year against the U.S. dollar, making it the second-worst performing currency behind the Argentine peso, according to data from Bloomberg.

Rating agency Standard & Poor's last week reduced its outlook to negative from stable, citing "heightened geopolitical risk" and the prospect of further sanctions from the U.S. and EU.

Currently, sanctions imposed by the U.S., European Union and Canada have primarily focused on individuals, but have also hit banks whose owners were among those sanctioned.

SMP Bank, co-owned by Putin allies Boris Rotenberg and his older brother Arkady, and Bank Rossiya, whose largest shareholder is Putin ally Yuri Kovalchuk, were hit by sanctions. Both banks are relatively small in terms of assets under management.

On Friday, Visa and Mastercard stopped processing transactions for customers of those banks, although by Sunday serviced had resumed at SMP.

Many, including S&P, expect broader sanctions, and that the banking sector may be targeted.

Russia has retaliated with sanctions against 13 Canadian officials, including five members of the Conservative government and three opposition MPs.

Many companies have raised concern that their business interests in Russia could be affected by increased sanctions or a protracted crisis.

Risks to Canadian businesses

Canada's Bombardier says the ongoing crisis could affect the final negotiations of a joint-venture that would see the company build Q400 turboprop aircraft in Russia.

Prime Minister Stephen Harper, speaking in The Hague on Sunday, called for strong action against Russia, adding, "We need to be prepared to take that action for the long term."

He also warned the business community that action against Russia may put those with business interests in the country at risk.

"Business people have to be aware there may be risks to them and the government will take those risks because, at those points in time, the government's foreign and security priorities become paramount."

"When you have something like a military occupation of a country by another country, this is not something that we can subordinate to economic interests. These have very serious long-term implications for all of us."

with files from The Associated Press