As the crisis in the Crimea continues, the Atlantic Council hosted a members conference call discussion of how the crisis will affect both the Ukrainian and Russian financial systems, featuring Anders Aslund, senior fellow at the Peterson Institute and adjunct professor at Georgetown University, and Michael Marrese, head of Central-Eastern Europe, Middle East, and Africa economics and strategy at JP Morgan.
The invasion is rocking markets in Kiev and Moscow, the ruble is falling. The speakers noted that the Ukrainian GDP is expected to drop by 3 percent this year and a further 1 percent in 2015, while Russian growth is projected to decrease from 1.8 percent to .8 percent. A negative economic backlash to Russia’s Crimean actions is likely the main reason President Putin stopped short of a full invasion of Ukraine, and it is only going to be more economically costly for Moscow to continue its occupation.
Russia’s economy is its critical weakness, and their financial problems have been exacerbated by the current crisis. They explained that there has been a recent run by Russians to acquire more hard dollars and euros at the expense of rubles, and Russian banks only have thirty billion dollars in liquidity. While the working assumption is that massive sanctions on Russia’s financial system will not take place (due to their ineffectiveness unless done in a coordinated and comprehensive fashion), there are three other ways the West can put economic pressure on Russia: tighter regulations on Russian businesses, cracking down on Russian money laundering, and threatening to cut the energy imports to Europe that are vital to the Russian economy.
Reducing Gazprom’s influence would be especially beneficial to Ukraine, as the energy sector has been the primary source of corruption in Kiev since the end of the Cold War. 60 percent of Gazprom’s European exports go through Ukraine, and since Kiev has a three to four month reserve supply, there is no immediate need to purchase energy from Gasprom. This situation also has the potential to finally line up the stars for the privatization of Ukraine’s energy sector, an important precondition for receiving IMF funding and attracting western investment to replace lost trade with Russia. In the long-run, the crisis will likely reignite momentum for a free trade agreement with the EU, a measure popular with both the Maidan protesters and eastern Ukrainian businessmen as it will open up the massive EU market and add an estimated 12 percent to Ukraine’s GDP.