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April 25, 2014 11:03 AM Economy Punishing Russia For Its Sins

By Ed Kilgore

It’s pretty close to a CW in this country that Russia’s going to get away with murder in Ukraine. Gabbers differ as to whether this crime is attributable to objective limitations on the ability of Russia’s critics to do much about its behavior towards a weak and divided neighbor that used to be part of the Soviet Union and of Imperial Russia before that, or because in their weakness and fecklessness Barack Obama and his European counterparts are failing to use magical powers to restrain Moscow.

But signs continue to mount that Russia is indeed paying a price for its misbehavior, via its own economy. Forbes’ Mark Adomanis reports the latest damage today:

While the Obama administration and its European partners are still debating the imposition of additional sanctions (some of which could be quite severe) the market has moved at a much more rapid clip, and things have been pretty ugly for Russian stocks and bonds.
Earlier today Standard and Poor’s cut Russia’s sovereign debt rating one step to BBB-, the lowest investment grade and one level above “junk” status. While the Russians have predictably bemoaned the “political” nature of S&P’s move, the reality is that this is the country’s first debt downgrade since December 2008 when the global financial crisis was in full swing Russia was on the verge of a really nasty economic downturn. S&P based its decision on slowing economic growth, geopolitical tensions, and capital flight that reached $70 billion(!) in just the first quarter. It’s impossible to know exactly what will come of S&P’s downgrade (the ratings agencies themselves don’t have any real power or authority) but it reflects a rapid souring of the mood in Russia and an overall worsening of economic conditions.
Another indiction of just how seriously the Russian economy is deteriorating was provided by the Russian Central Bank. At a previously scheduled meeting, it raised its key interest rate from 7 percent to 7.5 percent citing rouble weakness and high inflation risks. This follows on the heels of a two-point rate hike in March. The Russian Central Bank is actually a very well-run outfit, and it’s deeply disconcerting that it has been spooked enough to hike interest rates so dramatically. Despite the calm demeanor projected by Russian policy makers, their actions suggest something bordering on panic.

How Russia reacts to this economic deterioration is another matter, of course. But Adomonis
thinks the lessons should be reasonably clear:

To the extent that I am optimistic about Russia’s long-term trajectory it is because the country is much more integrated into the global economy than it has ever been in the past. But this is a two-way street: intergration presents a range of benefits but it also leaves a country much more exposed to the vagaries of investor sentiment. Russia is currently learning a very hard and painful lesson in how powerful investor sentiment can be. Hopefully the lesson it takes away isn’t that integration itself is undesirable, but that invading and annexing parts of a neighboring country isn’t a very smart thing to do.
Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

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