Russia's Growth Was Already Slowing—Then Came Crimea

A park in Volgograd. The economy is suffering from a fall in consumer spending

Elena Sokolova, who owns a cafe in downtown Moscow, says she’s had enough of President Vladimir Putin’s Russia and the arbitrary ways of the government. After the Russian leader seized Ukraine’s Crimea peninsula, sparking the worst geopolitical standoff since the Cold War, she and her family applied for residency in Bulgaria, a member of the European Union. “I can’t live without Russia—I love it,” she says. “But I’m really frightened at what’s going on in our country right now. Anything can happen to me or my business, so I need the chance to get out of here, maybe forever.”

As Russia’s ties with the West and its business climate deteriorate, the world’s largest energy exporter risks years of slow growth that could deepen its dependence on oil and gas and strengthen the state’s dominance of the economy. “Even before Crimea there was a slowdown,” says Sergei Guriev, a leading Russian economist and Putin critic who fled Russia for France last year and teaches at Sciences Po in Paris. “Now there are huge negative implications for the Russian economy as isolation will continue and worsen.”

U.S. and EU sanctions imposed because of the annexation of Crimea have targeted only a few dozen Russian officials and lawmakers as well as a handful of billionaires close to Putin. Already, though, the crisis has shaken business confidence, raising borrowing costs, slicing billions off the value of Russian stocks, and damping foreign investors’ appetite for Russia. If Putin orders forces to occupy eastern Ukraine, the West has warned it will reply with punitive measures similar in severity to those used to isolate Iran. Such an escalation of sanctions would wipe out a third of the ruble’s value and undo 10 years of progress in financial and monetary policy, according to Russian government officials who spoke on condition of anonymity.