Who else is sanctioning Russia? Investors
Until now Moscow has met Western sanctions, imposed in light of Russia鈥檚 actions in Crimea, with a shrug. The measures' costs are far outweighed by the benefits of bringing Crimea home, the Kremlin has said, and the country鈥檚 suspension from the Group of Eight was聽nothing to be concerned about.听
But Russia's investors are not as sanguine.听
Rattled by聽the country's increasingly erratic and bullheaded moves, investors have responded with the greatest capital flight from Russia since the financial crisis of 2008. The sting of the exodus might not be immediately apparent to Russian consumers, but it will compound the shocks that Russia鈥檚 oil-fueled economy already has to absorb 鈥� not least among them the costs of annexing the woefully underdeveloped Black Sea peninsula and reviving a slowing economy.听
In the first three months of 2014, capital outflow from Russia聽, Andrei Klepach, the deputy economy minister, said Monday. 鈥淧robably closer to $70 billion,鈥� he added.听
To put this in perspective,聽Russia's annual capital outflows last year was聽,聽and in 2012 it was $54 billion.听
Less than two months ago, before Ukraine's power overhaul and Russia's聽takeover of Crimea, Mr. Klepach forecast capital outflow聽in the first quarter of 2014 at聽: between $30 billion and $35 billion.
The massive sell-off by investors is potentially more significant than the enhanced sanctions being debated in Washington and Brussels.听Investors are responding to the unpredictability and outright irrationality of Moscow鈥檚 actions and the Kremlin's signal that geopolitics trump economic interests. That perception will be a tough problem to fix.听
鈥淟ack of confidence in Russian policymaking is the main reason for capital flight,鈥� prominent Russian economist Sergei Guriev two weeks ago. (He recently fled Moscow after criticizing the government left him fearing for his freedom and now lives in Paris.)聽
鈥淎 significant decline in [foreign direct investment]聽鈥� which brings not only money but also modern technology and managerial skills 鈥� would hit Russia鈥檚 long-term economic growth hard,鈥� he wrote.
The tip of the iceberg
Unless Russia manages to win back investor confidence, capital outflow聽for 2014 could聽reach a record $150 billion, in an economic assessment of the Russian economy released today. Such a sell-off would exceed the $120 billion in capital flight Russia experienced during the 2008 financial crisis 鈥斅燼 fall from which its capital聽markets have聽not yet fully recovered.听
Russia has plenty of foreign exchange reserves: . It also benefits from high oil and gas prices. So it may believe it can afford to play hardball.听
But the current capital-flight problem is just the tip of the iceberg, according to the World Bank. Its projections paint a bleak picture for the Russian economy, even if Moscow manages to avoid full-scale recession. The reasons are weak domestic demand and the government鈥檚 unwillingness to undertake economic reforms. But聽the Russian government often chooses short-term spot fixes to its economic woes at the expense of more long-term and painful reforms. And it will likely dive headlong into this "" faced with the fallout from Crimea, the World Bank warns.听
If tensions between Moscow and the West continue to spiral, the World Bank says, Russia should brace itself for a much more severe economic shock. Under this "high-risk" scenario, Russia's economy may contract by 1.8 percent this year.
Even if the impact of the Crimea crisis is short-lived, Russia's GDP growth stands at best to reach 1.1 percent this year, the report said. Compare that to the for GDP growth in 2014: 2.5 percent.
