Russia may actually be hurting from the US, EU sanctions

Russian stocks tumbled on Friday after the country was hit with a double downgrade, and the United States and the European Union stepped up sanctions against President Vladimir Putin and his inner circle.

The ruble-denominated MICEX exchange fell 3 percent in early deals, while the dollar-denominated RTS index lost 3.6 percent. The MICEX closed the session with a  loss of one percent, while the RTS closed down 1.45 percent. 

Investors rushed for the exits after Fitch Ratings on Friday cut its credit rating outlook for Russia to negative from stable, citing the potential impact of sanctions on an already slowing economy.

That followed a similar move by Standard & Poor’s on Thursday. The downgrades could make it more expensive for Russia to borrow money and do business. 

“Since US and EU banks and investors may well be reluctant to lend to Russia under the current circumstances, the economy may slow further and the private sector may require official support,” Fitch said in a statement.

US President Barack Obama on Thursday announced further sanctions against Russia as the country moved to annex Crimea from Ukraine. 

The US has blacklisted 20 Russian officials and wealthy businessman with close ties to Putin, as well as a bank known for handling many Kremlin accounts. Obama also left the door open for measures against key parts of the Russian economy.

European Union leaders, meanwhile, agreed to add 12 Russian and Ukrainian officials to their sanctions list for visa bans and asset freezes. A planned EU-Russia summit in Sochi has also been cancelled. 

"Russia must know that further escalation will only isolate it further from the international community," Obama warned on Thursday as he announced the sanctions.

Russia also slapped sanctions on nine US lawmakers and officials, in retaliation for an earlier round of US sanctions announced on March 17. 

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Even before this week's sanctions and downgrades, Russia's Deputy Economy Minister Sergei Belyakov had warned on Monday that the country was showing “signs of a crisis.”

Russian economic growth rates have “fallen each quarter since 2012; declining from 4.3 percent in the first quarter of 2012 to 1.2 percent in the last quarter of 2013,” Columbia University political scientist and Russian expert Timothy Frye wrote on Wednesday.

Fitch said the Russian economy grew a lackluster 1.3 percent in 2013 — the slowest pace since 2009 — as investment contracted. It lowered its 2014 growth forecast to less than one percent. S&P slashed its 2014 growth estimate to 1.2 percent from its previous forecast of 2.2 percent.

S&P estimated about $60 billion would leave Russia in the first three months of this year, about the same amount for the whole of 2013.

“In our view, heightened geopolitical risk and the prospect of US and EU economic sanctions following Russia's incorporation of Crimea could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia's already deteriorating economic performance,” S&P wrote.

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