This week, the European Union and the United States announced additional economic sanctions aimed at punishing Russia for its increasingly direct military involvement in eastern Ukraine. These and the previous rounds are beginning to bite; the already anemic Russian economy may be headed toward recession, and inflation is rising. And in the long term, Russia’s ability to develop its energy sector and restructure its massive debt is now in serious doubt.
And therein lies the problem: these sanctions may prove too effective, as serious short- and long-term damage to the Russian economy could lead to further instability in eastern Europe and Central Asia. A Russia with a sophisticated and effective military but a cratered economy would pose a substantial threat to its neighbors, especially since many of those neighbors possess large amounts of valuable natural resources. In other words, although sanctions may be intended to deter Russia from adventurism in its near abroad, they could end up doing just the opposite.
Even before Russia annexed Crimea and loaned its support to separatist rebels in Ukraine, the country’s economy was struggling. Analysts considered a forecast of a two percent increase in GDP in 2014 highly optimistic. In fact, many suggested, the economy was on the brink of recession. Sanctions -- as even Russian officials have admitted -- are making those gloomy prospects far worse. They have significantly increased inflation and the price of household goods. But there is bad news still to come. Indeed, the real bite of sanctions will be felt in the medium and long term. In addition to targeting Russian oligarchs and Russian President Vladimir Putin’s inner circle, the U.S. and EU sanctions will put significant pressure on Russia’s financial and energy sectors.
On the financial side, Russian banks and companies owe more than $600 billion in debt to foreign lenders. According to Russia’s central bank, over $150 billion of that debt will come due in 2014. Since Western financial institutions are now blocked from
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