Ukraine crises affects Russia: Responsible for flight of capital

A falling economy

Over the past three years, Russia has seen economic growth fall from 4.3% in 2011 to 1.3% in 2013. Even the Ukraine crisis has negatively affected the Russian economy. The Russian economy had been earlier predicted by the ministry to grow at 2.5% in the first quarter this year. However, the Russian economy minister, Alexei Ulyukayev, reported the growth to be only 0.8%.

At the same time, the Russian finance minister, Anton Siluanov, has admitted that the economy may see zero growth this year because of the Ukraine crises, warning that the country’s economy is facing the most difficult conditions since the 2008 crisis.

Prices of ETFs with exposure to Ukrainian and Russian securities, like the iShares MSCI Emerging Markets Eastern Europe ETF (ESR) and the VanEck Vectors Russia ETF (RSX) have bottomed out. The spill-over effect has been felt even by broad market indices like iShares S&P 100 Index Fund (OEF), with companies like Apple Inc. (AAPL) and Exxon Mobil Corporation (XOM) in its portfolio.

The economy slowed as investors pulled money out of the country. The acute international situation of geopolitical instability has led to a flight of capital from the country. The capital flight is a result of the mass conversion of roubles into foreign currencies. The country has already seen capital flight of $63 billion in the first three months of 2014. Russia’s annexation of Crimea is also set to increase the state spending.

The continued slowdown in growth has also been linked to a dependence on energy exports and an economy in need of modernization.

On the diplomatic front, Russia may face new sanctions, as stated by U.S. President Barack Obama, “What I’ve said consistently is that each time Russia takes these kinds of steps that are designed to destabilize Ukraine and violate their sovereignty, that there are going to be consequences.”

He believes the Russian President Vladimir Putin’s decisions to be not just bad for Ukraine, over the long-term, but for Russia as well.