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Russian economy hurts as sanctions loom

Friday, March 14, 2014 - 02:46

Mar.17 - As Crimea holds a referendum on whether to secede from Ukraine and join Russia, investors are fleeing Russian assets and the rouble looks increasingly vulnerable. Joanna Partridge asks whether the ongoing tension will continue to drive capital out of Russia.

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War games as a prelude to a referendum. Russia shipped more troops and armour into Crimea on Friday, just before the pro-Moscow authorities in the region hold a vote on joining Russia. The Russian Foreign Ministry also repeated President Putin's declaration of the right to invade other parts of Ukraine to protect Russian citizens. This, a response to clashes in the mainly Russian-speaking Ukrainian city of Donetsk which left at least one person dead. A last-ditch attempt at negotiation when Russia's Foreign Minister Sergey Lavrov met his U.S. colleague John Kerry in London - which resulted in them giving separate press conferences. SOUNDBITE: John Kerry, U.S. Secretary of State, saying (English): "After much discussion, the foreign minister made it clear that President Putin is not prepared to make any decision regarding Ukraine until after the referendum on Sunday." The referendum is expected to provoke western sanctions against Moscow. Russian stock indices plunged to their lowest levels since 2009 on Friday - they've lost around 18% this month. Russia's cost of insuring its debt also soared. Sanctions would hit the economy hard says Tim Ash from Standard Bank. SOUNDBITE: Tim Ash, Head of Emerging Markets Research, Standard Bank, saying (English): "So even if companies can finance themselves, it would be a lot more expensive, we'll see a huge amount of capital flight. Former Finance Minister Kudrin has come out with a figure of $200 billion, that means pressure on reserves, it means the central bank probably has to higher interest rates. The Russian economy was already going nowhere fast, it already had very weak underlying fundamentals because of structural problems. Higher rates mean lower growth and possibly even recession and I think the U.S. action earlier this week to release oil from its strategic energy stockpiles is also fairly significant. The other way the West can hit Russia is through lower oil prices." A bleak outlook. One the Russians know only too well, says Simon Derrick from BNY Mellon. SOUNDBITE: Simon Derrick, Chief FX Strategist, Bank of New York Mellon, saying (English): "Probably the most obvious time is to go back to 2008 August, September, and clearly there was heavy pressure on the rouble right from the point they walked in to Georgia, equally there was heavy pressure on Russian markets. What we saw on the first two days of events in Crimea very much tied in with what we saw then, and equally the spending by the Russian central bank to defend the rouble was very consistent." Russia's central bank kept interest rates on hold on Friday, after unexpectedly raising them two weeks ago. It said its priority was to contain the effect of the rouble's exchange rate on inflation and keep financial stability. The outcome of Sunday's referendum could well determine how difficult their job is.

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Russian economy hurts as sanctions loom

Friday, March 14, 2014 - 02:46

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