Russian businesses worry Malaysian plane crash will lead to long term isolation, sanctions

MOSCOW—Having for months dismissed Western sanctions on Russia as toothless, business leaders here are now afraid that the crash of the Malaysian jetliner will bring about an international isolation that will cause serious and lasting economic damage.

Throughout the Ukrainian crisis, U.S. and European sanctions had mainly targeted a handful of individuals, sparing economic ties. Then last week the U.S. imposed penalties on some of Russia’s largest corporations. And when the airliner was shot down just a day later in Ukraine, allegedly by separatists with Moscow’s support, concern grew in Russia that the sanctions would only get worse as President Vladimir Putin showed little sign of co-operation.

“Over the past few months, there was a sense that Mr. Putin acted decisively, forcefully, and correctly, and that everybody else in the world would accommodate themselves to that reality and we’d get back to something like business as usual,” said Bernard Sucher, a Moscow-based entrepreneur and board member of Aton, an independent investment bank. “Now we’re talking about real fear.”

When Russia annexed Crimea in March, triggering a deep freeze in relations with the West, stock markets in Russia dropped but later rebounded as investors understood that the country’s lucrative trade relations would remain largely unscathed. Europe, which is in frail economic health, dared not block energy imports from Russia or the trade in goods such as cars or heavy machinery. Oil companies like BP and ExxonMobil continued their operations in Russia, with some even signing new deals.

The U.S. took a tougher stance, but until last week was also careful to limit sanctions to asset freezes on individuals who were perceived to have had a hand in supporting eastern Ukraine’s insurgency.

On July 16, the night before the Malaysia Airlines jet crash, Russian markets appeared to have fully recovered from the crisis in Ukraine, with the MICEX benchmark index adding roughly 23 per cent since March 1.

Then last week, the U.S. announced new sanctions that had investors in Russia fear a turn for the worst. The U.S. shut off its financial markets for a broad swath of defence companies as well as Russia’s largest oil company, Rosneft, gas producer Novatek, which is half-owned by a close Putin ally, and a major bank, VEB. The move offered investors a glimpse of what they had thought would never happen: serious international isolation of Russia’s powerhouse corporations.

According to Alexis Rodzianko, president of the American Chamber of Commerce in Russia, those sanctions were the first to really pack a punch because they were “broader and more specific: they went beyond the symbolic.”

Rodzianko said anecdotal evidence suggests that in some cases investment decisions have been delayed “particularly when people were just considering coming in to the market.”

When the Malaysian airliner went down one day later, investors worried conditions would only get worse.

The stock market has fallen 5 per cent since Thursday last week. That is expected to see investors keep pulling money out of the country. They withdrew $74.6 billion in the first six months of the year, a figure forecast to reach $100 billion for the whole of 2014—almost twice the $60 billion in withdrawals seen last year.

Growth, meanwhile, is nose-diving. The International Monetary Fund this week slashed its forecast for 2014 from 1.3 per cent to 0.2 per cent. And the currency is unstable—Russia’s central bank on Friday raised its key interest rate by half a point to 8 per cent, saying the heightened geopolitical risks are putting pressure on the ruble.

And yet, there is little public criticism—none at all from the billionaire oligarchs.

Russia’s biggest companies denied comment for this story. One spokesman said he was not authorized even to say a “no comment” for an article about sanctions.

A person who had close ties to the government until last year told The Associated Press that it is “too risky to express concerns in public and even in closed-door meetings with Putin.” The person, who spoke only on condition of anonymity, said tycoons usually express their concerns to government officials who in turn communicate them to the president.

That silence has been a hallmark of Putin’s rule. In the early 2000s, he forged a deal with Russian businessmen in which the Kremlin offered its protection for the often murky deals that created the oligarchs’ fortunes. In return, the tycoons promised to not meddle in government policy. The only man who broke this rule—Mikhail Khodorkovsky, once Russia’s richest man—was punished with two sets of charges and spent 10 years in prison before he was pardoned by Putin a month before the showcase Winter Olympics held in Russia.

In public, Putin appears to be unfazed by the economic sanctions. In a speech Tuesday, he suggested Russia should accept to sacrifice economic growth for the sake of foreign-policy objectives—a nightmare scenario for a business leader hoping to tap global markets.

But analysts note that for all his belligerent rhetoric, the Russian leader has softened on some fronts in Ukraine.

Though the first rounds of sanctions, which targeted Putin’s billionaire friends, were perceived as a failure, they did work in the sense that Russia did not annex any other parts of Ukraine the way it did with Crimea, says Sergei Guriev, a prominent Russian economist now working at Sciences Po university in Paris. They also “forced the Russian government to recognize Ukrainian elections,” he said.

Putin seems to be in a balancing act, seeing how far he can pursue his geopolitical interest in Ukraine without getting hit too hard by sanctions. The U.S. and EU’s level of tolerance may have dropped since the Malaysian plane’s downing, however, increasing the risk of damage to Russia’s economy.

Russia’s former long-time finance minister Alexei Kudrin blames a part of Russia’s political elite for seeking Russia’s isolation from the rest of the world, no matter the cost to businesses.

“Business wants development, wants to invest, build new factories, trade. And businesses are really worried about what they hear on radio and television,” Kudrin said in an interview with the Itar-TASS news agency.

On Tuesday, EU governments targeted more Russian officials with economic sanctions and travel bans and said they would draw up more sweeping measures in coming days if Russia failed to use its influence over the rebels to ensure an independent investigation into the Malaysian plane disaster. New sanctions would target Russia’s high-tech, energy and weapons industries, they said.

Despite those warnings, however, it is unclear how far the 28-member bloc is willing to go, as it has a lot to lose economically. Defying calls from London and Washington to impose an arms embargo on Russia, France on Tuesday announced it would go ahead with the sale of a warship to Russia.

The U.S. and EU are still playing something similar to “good cop, bad cop” with Russia, said Chris Weafer of the Moscow-based Macro-Advisory, but it remains to be seen whether the Malaysian plane crash will be a game changer.

“Either the event will push Russia toward greater isolationism …

or it will mark some sort of end, or the start of the end, of the most dangerous phase in the conflict in eastern Ukraine.”

In the meantime, Russia’s businesses will have to cope with the uncertainty.