Against the backdrop of the threat of sending Russian troops to the Crimea, analysts with Bank of America Merrill Lynch and Credit Suisse have estimated the impact of Western sanctions on Russia and the country's leadership. This topic is expected to be debated at an emergency meeting of the Council of the European Union. The G8 and other countries are willing to isolate Russia, United States Secretary of State John Kerry threatened in a Sunday interview on the NBC television network, the Vedomosti newspaper reports.
On Monday, the foreign ministers of the European Union were also expected to make a decision on an observation mission of the Organization for Security and Cooperation in Europe (OSCE) and call on Russia to sit at the negotiating table, said German Foreign Minister Frank-Walter Steinmeier (as quoted by the Interfax news agency). One day earlier, Russian President Vladimir Putin agreed to a proposal by German Chancellor Angela Merkel to send an OSCE mission to the Crimea to investigate the events on the peninsula.
For example, analysts with Credit Suisse believe that the threat of sending Russian troops to the Crimea is a major foreign-policy adventure that could lead to sanctions from the United States and the European Union. However, sanctions may be imposed only if Russia chooses the toughest scenario: invasion of eastern Ukraine and a split of the country, Credit Suisse emphasizes. Experts estimate the probability of such a scenario at 15-20%. It could be the consequence of targeted actions by the Russian leadership or a loss of control over the situation.
In this case, the risks of sanctions on Russian goods and the Russian leadership will be very high. In response to Russia's actions, the European Union may completely block the construction the South Stream gas-pipeline project and stop buying Russian gas by switching to other suppliers or other types of fuels, says Credit Suisse.
The West can also block market access to Russian Eurobonds, says Credit Suisse. This will limit sources of funding and increase the cost of debt servicing because investors will reconsider the level of risk associated with Russian assets and many will simply not want to hold securities issued by a country under sanctions. A further weakening of the ruble will begin: devaluation will increase nominal budget revenues (an additional 0.24% of GDP for every extra 1 RUB/USD), but the risks of revenue shortfalls because of an economic slowdown and a possible drop in oil prices are higher.
If Russia limits itself to sending troops to the Crimea without invading eastern Ukraine, primarily certain high-ranking officials risk falling under sanctions, according to Credit Suisse. This could also lead to a deterioration of the country’s credit rating and, as a consequence, an increase in the cost of debt servicing, additional budget expenditures, and increase of the budget deficit in excess of the projected 0.5% of the GDP.
Armed conflict can be costly to Russia, analysts with Bank of America Merrill Lynch agree. They estimated the cost of the military operations at 3% of Russia’s GDP. About half of Russian gas exports to Europe (worth USD 30 billion a year) go through Ukraine. Deliveries to the Ukrainian market are worth an additional USD 30 billion. The pumping of gas is likely to be suspended in the event of military hostilities, analysts warn.