The West and Russia have differing opinions about the legitimate extent of Russian interests within the territory of Ukraine. The West perceives the recent referendum in Crimea over re-joining Mother Russia as an annexation; the Russian position is that it is a democratically expressed wish of the people of Crimea who have close historic ties to Russia. The West has made its displeasure known diplomatically and through the imposition of sanctions. Some foreign investors in Russia have voted with their feet by withdrawing funds, largely because of the current uncertainty and potential, future downward bumps in Russia’s economic fortunes – money knows no loyalty.
The IMF believes that Russia is currently in recession under the definition of two successive quarters of contraction. The IMF has trimmed its growth forecast for Russia from a modest 1.3% to a weak 0.2% for 2014. The reasons cited by the IMF all stem from the instability and fall-out from the on-going crisis in neighbouring Ukraine. The IMF says that the geopolitical crisis is likely to cause an outflow of $100 billion of investment this year. Clearly any escalation of the trouble, or further Western sanctions in the face of perceived Russian intransigence can only exacerbate the situation.
Ratings agency Standard and Poor’s has also chimed in on Russia’s credit rating, dropping it to a notch above junk which means that Russia is likely to have to pay more interest when raising capital on money markets. The Russian currency, the Rouble, has lost more than 8% of its value against the Dollar so far this year. The slide of the currency has forced the central bank to boost interest rates to 7.5% in a bid to shore it up. Even with such relatively expensive money, inflation is predicted to be above 6% for 2014.