Author: Kim Iskyan
Protesters in Maidan square, central Kiev, Ukraine.

An escalation of sanctions on Russia stemming from its actions in Ukraine could pressure Russia’s overall economic growth. Some companies, particularly those perceived to have close ties to president Vladimir Putin and his inner circle, may have difficulties tapping the international capital markets for funding.

As the ruble weakened owing to market concerns over the Russia-Ukraine conflict, the Central Bank of Russia in early March hiked interest rates by 150 basis points to 7%, and central bank governor Elvira Nabiullina said in early April that rates would not be cut until June at the earliest. The currency fell sharply against the dollar in the first quarter, although its decline was slowed by the rate hike. The CB spent $25 billion defending the ruble—the most it has spent in a one-month period since January 2009. After the hike, analysts cut GDP forecasts to a consensus level of 1.2%. However, the central bank says growth might not broach 1%. The economy grew just 1.3% in 2013.

Investment by Russian companies—which declined 7% in January, compared with a year earlier—will be a key drag on growth. Consumer demand, which is being supported by sharp increases in budget expenditures, will likely remain the strongest growth driver of the economy. Capital flight increased sharply as the perception of political risk rose, to nearly $70 billion in the first quarter, according to deputy Economy minister Andrei Klepach. Analysts forecast that it might reach as much as $170 billion this year. In 2013 capital flight for the full year amounted to $63 billion. Citing heightened political risk, in mid-March S&P and Fitch ratings agencies downgraded to negative from stable their long-term outlooks on Russia’s debt.

Forecasts for Russian banks in 2014 have fallen, owing to anticipated continued weakness in equity and bond markets and the likelihood of higher rates for Russian banks on international wholesale markets. Many firms have significant exposure to Ukraine, and an anticipated sharp economic slowdown there could further hurt their earnings.