Without EU Cash, Russian Business Is Sunk
Published: August 1, 2014 (Issue # 1822)
Before the downing of Malaysia Airlines Flight MH17, it was hard to see how the Europeans were going to implement serious economic sanctions against Russia. But the shooting-down of a civilian airliner has been a political game-changer and has rapidly pushed formerly reluctant countries like Germany and France to a position that was widely considered impossible not even a full month ago.
It is possible, of course, that the Europeans will lose their nerve. Stranger things have happened than the European Union changing course at the last minute, and nothing prevents the sanctions from being softened a week, a month or, God forbid, even a year down the line.
Given the political reality, however, and the Russian government's continued and loud insistence that it has nothing to apologize for, it now seems probable that Russia will be faced with a sanction regime for the short and medium terms. I'd like to forecast a reduction in tensions in Ukraine because that country has suffered enough already. But over the past five months, every time it appeared that things had finally started to get better, they rapidly relapsed.
So what will the sanctions do? The consensus view among most economists is that they will be a serious, if not catastrophic, problem.
In particular, Western analysts express broad agreement that the latest sanctions will substantially limit Russian companies' ability to borrow and will make that borrowing much more expensive. After all, it is hard to structure a deal when no one knows whether the bank funding it will soon be on a Western blacklist.
The Russian finance sector is largely at a standstill already, a combination of the sanctions themselves and the pervasive uncertainty they have inspired. Russia has benefited greatly from its ability to access long-term credit in Western financial systems, particularly London, and that access is now sharply constrained.
Many people — particularly those who work in, or are sympathetic to, the Russian government — argue that the sanctions will actually help Russia by forcing it to more intensively develop certain areas of its economy.
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