Russian economy braces for punishment after Crimea seizure

Zero growth or even recession in 2014, asset freezes in the West and tens of billions of dollars in capital flight -- Russia must brace for the consequences of putting political ambition above economic sense in seizing control of Crimea, analysts say.

The huge "yes" vote in the disputed referendum in the Ukrainian region of Crimea to become part of Russia means Moscow has claimed an addition to its territory for the first time since the end of World War II.

But President Vladimir Putin's swoop has given the Kremlin's economic policy makers an unenviable task of limiting the inevitable damage to the economy which was already showing troubling signs of weakness.

"There are many signs the economy is now being hit by an uncertainty shock," said analysts at VTB Capital, slashing their forecast for growth in Russia in 2014 to zero.

"We see downside risks if uncertainty remains elevated for a protracted period or if severe sanctions are imposed," VTB added.

The United States and European Union after the referendum result on Monday announced the first sanctions against Russians and Ukrainians deemed responsible for the vote, slapping officials with travel bans and asset freezes.

But both the EU and the US left the door open for further measures, which potentially could go beyond these relatively superficial actions and hit the wider economy.

Analysts call the second option the "Iranian scenario" as it recalls the measures slapped against Tehran over its nuclear programme that eventually brought the Iranian economy to its knees.

"The Russian economy is already weak, and this crisis ?- even in the best case scenario of sanctions being limited to political and diplomatic things ?- will further slow growth to a virtual stand-still," said Erik Nielsen, chief global economist at Unicredit.

If tough sanctions were imposed, then "Russia almost certainly will sink into recession," he said.

- Preparing for the worst -

There are already signs that Russia has been battening down the hatches in anticipation of serious trouble.

A record drop of over $100 billion in US treasury securities held by foreign banks in the week ending to March 12 was attributed by analysts to Russia taking its money elsewhere in anticipation of possible asset freezes.

"It is quite possible that these are withdrawals that have been made by the Russians," said Rene Defossez, a strategist at Natixis in London. "If you were a Russian investor, you would not want to have your capital blocked abroad."

There have also been reports that Russian state-owned banks have been pulling their money out of Western banks with operations in the United States in fear of US sanctions.

Meanwhile the Vedomosti daily reported that in a rare sign of flexibility Russian gas giant Gazprom was discussing discounts with European clients in the hope of winning their support if the EU tries to move away from Russian gas imports.

The Kommersant daily said even Gazprom chief executive Alexei Miller and the head of Russia's largest gas company Rosneft Igor Sechin were on a black list of Russians who could in future be added to the list of those banned from travelling to the EU.

- Capital flight -

The economic links between Russia and the West have grown hugely in the last years, with Western energy majors investing in Russia and Western firms taking lead roles in Russian infrastructure projects.

Alan Ruskin of Deutsche Bank said there was a shared economic interest of reaching a mutually acceptable solution to the events in Ukraine.

"By the same token, the scale of financial disruption should events descend into tit-for-tat financial sanctions should not be underestimated," he said.

Russia is still able to boast strong foreign currency reserves that total close to $490 billion and allowed it to spend over $11 billion defending the ruble earlier this month.

Yet the swiftness with which capital is being taken out of Russia is alarming.

Neil Shearing of the Capital Economics consultancy in London said net private capital outflows have totalled $50 billion since the start of the year as worried foreign investors took their money out of Russia.

If current trends continue, the capital flight could total $70 billion for the first quarter, 3.2 percent of Russia's total GDP.

"There is a real risk that this could push Russia into recession this year," he said.