Russian government officials and businessmen are bracing forsanctionsresembling those applied toIranafter what they see as the inevitable annexation ofUkraines Crimea region, according to four people with knowledge of the preparations.Iran-style retaliation from the West, which would include freezingRussiasforeign reserves, banking assets and halting lending to companies, is being treated as an unlikely worst case, according to the people, who asked not to be identified as talks are confidential. Still, officials are calculating the economic cost of a sanctions war with the West, the people said.
If Russia begins to answer sanctions with sanctions, it will be a pure loss for the country, Natalia Orlova, chief economist atAlfa Bankin Moscow, said by phone. More than 40 percent of consumption is imported goods.
Some Russian political leaders are hoping that PresidentVladimir Putinwill moderate his response to the crisis, the people said. Putin is consulting with the security forces and military about Ukraine, and some officials are afraid to voice opposition to what they see as a course hes already chosen, two of the people said.
Retaliatory Sanctions
Russia retaliating with sanctions against the West could wipe out10 years of achievementsin financial and monetary policy, one of the people said. Such escalation could erase as much as a third of the rubles value, another said.
Dmitry Peskov, Putins spokesman, declined to comment on the matter.
The ruble has slumped 9.8 percent against the dollar this year, the worst-performer afterArgentinas peso among 24 emerging-market currencies tracked by Bloomberg. The yield on Russias February 2027 ruble bond was unchanged from yesterdays record-high close of 9.36 percent.
The Ukraine crisis triggered the worst standoff between Russia and the West since the end of theCold Warafter Russian forces seized the Crimean peninsula. GermanChancellor Angela Merkelsaid today Russia risks massive political and economic damage, after saying yesterday that a round of European Union sanctions is unavoidable if Putins government fails to take steps to ease tensions.
Get Ugly
U.S. PresidentBarack Obamamet yesterday at the White House with Ukrainian Prime Minister Arseniy Yatsenyuk and called Russias incursion into Crimea a violation of international law. The president told reporters that if Russia doesnt change course, the U.S. and the international community will be forced to apply a cost.
Obama suggested that if Russia backs down there could be different arrangements over time for Crimea in line with Ukraines constitution. But that is not something that can be done with the barrel of a gun pointed at you.
InWashington, U.S. Secretary of StateJohn Kerryyesterday said at a congressional hearing that sanctions on Russia could get ugly fast if events justified them. Group of Seven countries called on Putin to immediately halt efforts to pry Crimea away from Ukraine, to reduce Russian forces to pre-crisis numbers and to allow international monitors and mediation.
Visa Bans
The U.S. and the EU used sanctions against Iran to pressure it into negotiations over the Islamic republics disputed nuclear program. While almost all U.S. trade with Iran was banned after theIslamic Revolution, the West started imposing stricter penalties on energy, ports, insurance, shipping, banking and other transactions in 2010.
U.S. restrictions also apply to other countries that trade with Iran. Limited relief was granted after Iran signed a temporary accord in November, though core oil and banking restrictions were kept in place.
The EU announced a three-stage sanctions process against Russia last week, starting with the suspension of trade and visa-liberalization talks. Stage two includes asset freezes and travel bans for as-yet unidentified officials and would be imposed if Russia boycotts international talks on a settlement. Stage three envisages additional and far-reaching consequences if Russia further destabilizes Ukraine.
Hasty Moves
Britain hosted a meeting this week to compile a list of people who could be hit by sanctions. The U.S. banned visas for Russian officials and others it said were complicit in violating Ukraines sovereignty, while Obama also authorized financial measures.
Putins government has been struggling to diversify the economy to revivegrowth, which slowed to 1.3 percent last year, the worst performance since a 2009 recession. Russia, the worlds biggest energy exporter, supplied 30 percent ofEuropes natural gas last year, half of which was shipped across Ukraine, according to data from state-run OAO Gazprom.
EU foreign ministers meet March 17, a day after Crimea votes in a referendum about joining Russia, to consider asset freezes and travel bans on Russian political and business leaders they consider responsible for instigating and profiting from the events on the Black Sea peninsula.
Russias position is unchanged by the threat of sanctions, Foreign MinisterSergei Lavrovsaid March 4. Three days later, he cautioned Kerry against hasty and ill-considered moves that could hurt relations.
Mutual Damage
The government is in talks with Russian billionaires and state companies about risks they face in case of Western sanctions, the people said. The Kremlin needs to know which companies are most likely to be affected by fallout including loss of access to new foreign loans and the prospect of margin calls, they said.
Business is not yet showing too much concern about the possible sanctions, according to three top executives who took part in the meetings.
The EU, Ukraine and Russia are economically dependent on each other in many regards, so strict sanctions will be hard on all sides, Putin has said.
In the modern world, when everything is interconnected and everybody depends on each other one way or another, of course its possible to damage each other -- but this would be mutual damage, Putin told reporters March 4.
The Russian economys prospects in a difficult global economic environment were the topic of a closed meeting between Putin and senior officials yesterday in the Black Sea resort of Sochi, Peskov said by phone. Putin yesterday urged the government to ensure Russias ability to react immediately to internal and external risks.
The Russian government is also in talks with companies about speeding up state support in the form of guaranteed loans to reduce potential damage from sanctions, said two of the people. Business leaders have asked for a meeting with Russian Prime MinisterDmitry Medvedevto discuss the situation, the people said.
Natalya Timakova, Medvedevs spokeswoman, declined to comment on his schedule.
By Bloomberg
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