Sanctions Intensify Russia's Free Fall Into Economic Crisis : Parallels The Russian economy took a big hit in 2014. The U.S. and other countries imposed economic sanctions after Russia annexed Crimea, but it was falling oil prices that really hurt the country.
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Sanctions Intensify Russia's Free Fall Into Economic Crisis

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Sanctions Intensify Russia's Free Fall Into Economic Crisis

Sanctions Intensify Russia's Free Fall Into Economic Crisis

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STEVE INSKEEP, HOST:

Let's check up on two of the world powers that Americans worried about the most in 2014 - one is China. And we start with Russia, which has spent this year defying the West. As part of its confrontation with Ukraine, Russia seized Crimea. It's showing no sign of giving up, but the Russian economy, which was soaring one year ago, is now sagging. The government says the economy contracted last month - the first time in years. Oil prices are killing Russia's business, and so are economic sanctions. Here's NPR's Jim Zarroli.

JIM ZARROLI, BYLINE: President Obama and other Western leaders were quick to condemn Russia when it annexed the Crimean Peninsula last March, and they struggled to find a way to show their outrage. Will Pomeranz is with the Woodrow Wilson Center.

WILL POMERANZ: Obviously, a military response to Ukraine was not on the table, and some response was necessary.

ZARROLI: The response was a series of limited economic sanctions on companies and individuals close to President Vladimir Putin. These sanctions were derided as ineffectual, but European countries that depend on Russia for oil and gas were reluctant to go further. Then in July came a tragedy that would force the West's hand.

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UNIDENTIFIED WOMAN: This morning, grief-stricken families gathering at airports in Amsterdam and Kuala Lumpur, awaiting confirmation about the victims of flight MH17.

ZARROLI: A Malaysian airliner was shot down over Ukraine, allegedly by separatists backed by Moscow - again, Will Pomeranz.

POMERANZ: The sanctions took off to a whole new level in the aftermath of the shooting down of the Malaysian airliner. After that, much more comprehensive and sectoral sanctions were introduced.

ZARROLI: The new sanctions made it much tougher for Western banks and companies to do business with Russia. By themselves, these sanctions didn't have a huge impact, says Robert Kahn of the Council on Foreign Relations.

ROBERT KAHN: But I would also argue that sanctions are, if you will, a force multiplier in this environment, that they are making the oil price dislocations much more powerful than they would have been otherwise.

ZARROLI: The sanctions coincided with a steep drop in the price of oil, which had become the lifeblood of Russia's economy. With inflation climbing, the value of the ruble fell by more than 40 percent. Russian companies that had borrowed in euros and dollars struggled to pay their debts. And Kahn says the sanctions left them with few options to handle the crisis.

KAHN: The normal buffers that an economy like Russia has to respond to an oil price shock aren't there. Borrowing abroad to smooth what might be a temporary shock can't do it. Expanding trade to offset the loss of oil revenue really is quite limited in the current environment.

ZARROLI: At the same time, Russia has lashed back by blocking imports from the West, making it much tougher to acquire meat and produce from Europe and North America. Russia's oil wealth has given it large foreign reserves, but it's been forced to spend more than a fifth of them this year to stabilize its banks and companies and keep its ruble from sliding too much. And Russian economist Sergei Guriev, who teaches at Sciences Po in Paris, says Moscow can't keep spending down its reserves forever.

SERGEI GURIEV: Currently, it cannot borrow, and so it is clear that in two or three years when Russia completely spends the reserves, it will have to make substantial spending cuts. And this is not going to be politically popular.

ZARROLI: Meanwhile, some in Congress have called for ratcheting up sanctions against Moscow, but Guriev, who fled his homeland for political reasons, warns against pushing Russia too far. A country with nuclear weapons is now facing what he says is nothing less than an existential crisis and cornering its government, can only make the world a less stable place. Jim Zarroli, NPR News.

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