Plunging stockmarket, diving rubble may bring Russian bear to heel

A woman passes by a barricade in a street heading to Kiev's Independence Square, Ukraine. Photo / AP

Unable to intervene militarily and with no direct economic levers to pull, the West believes it is successfully pressing Russia in the Ukraine crisis by threatening to turn her into a pariah state and deny her elite the foreign assets, private schools and shopping trips they cherish.

Strategies to cripple Russian investment and the foreign interests of its ruling class lie at the heart of talks in Washington and Brussels, where the European Union and the North Atlantic Treaty Organisation are wrestling with the worst East-West crisis since the end of the Cold War.

Ideas being mooted to punish Russia for its seizure of Crimea, Ukraine's strategic peninsula in the Black Sea, include a "broad range of options", including sanctions on Russian individuals and institutions, US State Department spokesman Jen Psaki said yesterday.

"I would say that the steps that we are taking are having an impact," she said. "If you look at the sharp decline of the Russian rouble, if you look at the Russian stock market today, those are just two examples."

On the first day of trading since the crisis intensified at the weekend, Russian markets reeled at the financial impact from President Vladimir Putin's Crimean gamble.

The stock market in Moscow crashed by up to 12 per cent and the rouble plunged to a record low against the US dollar and euro. The central bank hiked its main interest rate by 150 basis points and sold roubles worth between US$10 billion ($12 billion) and US$12 billion, Luis Costa, a Russia analyst at CitiFX traders in London told the Herald.

Both the currency and stocks recovered much of the lost ground yesterday, after Putin ruled out war with Ukraine and said use of military force by Russia would be "a last resort". In words freighted with legal and diplomatic nuance, he also said the uniformed gunmen in Crimea were not from Russia, but were "local self-defence forces".

Referring to sanctions, he growled: "Any threats towards Russia are counterproductive and harmful."

Hours earlier, the 28 EU nations said they would take "targeted measures" if Russia failed to back down. Measures could include suspension of talks to ease visa restrictions and upgrade bilateral ties, which Moscow has been seeking.

These steps add to the prospect that Russia may be kicked out of the prestigious Group of Eight club of industrialised nations, which it joined in 1998 in a reward for what was then seen as its democratic transition.

The strategy aims at hitting Russia's elite and wrecking what remains of the country's image as a secure place for business, said observers.

By doing so, it avoids making empty - and dangerous - military threats against Russia and the self-inflicted wound of cutting off trade.

"Europe matters a lot to Russia, because Europe collectively takes about 50 per cent of Russian exports and we are the source of a lot of investment into Russia," said Philip Hanson, of the Chatham House thinktank in London. "There is a lot of flow each way, which certainly matters to Russia and certainly matters to us."

Europe's prime import from Russia is gas, which supplies at least a quarter of the bloc's needs compared with 45 per cent a decade ago. The former Warsaw Pact states of Bulgaria, Hungary and Romania are virtually 100 per cent dependent.

"Economic sanctions are not going to do that much damage, the damage is actually being done with the fall of the rouble and the collapse of the stock market. So Russian businessmen might start putting pressure on Putin," said Fraser Cameron, former EU adviser and now director of the EU-Russia thinktank in Brussels.

"Ultimately, what will hurt Russia is not having access to European schools, the European property market or face visa bans, the freezing of assets and much stricter controls on Russian capital outflows - that is what will hurt Russia."

Arkady Moshes of the Finnish Institute of International Affairs said Russia's intertwinement with the world economy was the pressure point, the means to achieve a potential compromise - and this made the big difference between now and the Cold War era, when the Soviet economy was self-contained. "What gives me hope is that Russia is part of the global economy and it is a market economy, it's a weak one, a very special one and the Government still interferes heavily through administrative measures. But the point is the Russian economy reacts to certain factors the way any normal market economy reacts."

He added: "A country which is at war and which is already experiencing essentially a recession starting in the first months of this year with a noticeable slowdown and is already under certain economic pressure and then starts a war ... well, the economy reacts in the way any normal economy would react in this situation. I hope this might have some kind of sobering effect."

Analysts said maintaining pressure on the volatile Putin was essential but some felt Russia's control of Crimea may well be permanent.

"The [Russian] central bank has been extremely concerned with domestic growth and at a certain point - we are not at it yet - the economic losses will start eating up any benefit the Kremlin might see on its geo-political stance," said Costa.

Moshes said: "Unfortunately the genie is out of the bottle. A de-facto Russia protectorate [in the Crimea] will be a reality."