March 25 (Bloomberg) -- The world’s top industrial powers threatened further sanctions to deter Russian President Vladimir Putin from taking over other parts of Ukraine and suspended Russia from participating in the Group of Eight.
Meeting for the first time since last week’s annexation of Crimea by Russia, Group of Seven leaders said last night they won’t attend a planned G-8 meeting which was to have been held in Sochi, site of the Winter Olympics, and will instead hold their own summit in June in Brussels.
“While a Russian invasion of eastern Ukraine can by no means be excluded, Putin must surely calculate that it would be a poor and risky option,” Roderic Lyne, deputy chairman of Chatham House in London and a former U.K. ambassador in Moscow, said in a comment on the research group’s website. “He also knows that it would trigger much deeper Western sanctions, which would hit his Achilles heel –- Russia’s declining, unreformed economy.”
Both sides in Ukraine’s crisis spent the day calculating what to do next, with Russia consolidating its control over Crimea and maintaining forces along the border with Ukraine in the most serious confrontation between Moscow and the U.S. and its allies since the demise of the Soviet Union. The International Monetary Fund is set to make an announcement tomorrow following talks about a bailout loan for Ukraine, Finance Minister Oleksandr Shlapak said.
U.S. and European officials said sanctions are already biting. Russia’s Micex stock index has plunged 13 percent this year, worse than the 4.8 percent decline in the MSCI Emerging Markets Index. It was up 0.8 percent as of 2:47 p.m. in Moscow.
The ruble has weakened 7.9 percent in 2014, making it the second-worst performer against the dollar among 24 developing-market currencies tracked by Bloomberg. It gained 1 percent to 35.6785 per dollar today.
Russia’s Finance Ministry canceled its fourth ruble-bond auction in a row, scheduled for tomorrow, citing “unfavorable market conditions” in a statement on its website.
Investors pulled $5.5 billion from Russian equities and bonds this year through March 20, already approaching the total outflow of $6.1 billion for all of 2013, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based company that tracks fund flows.
An IMF team was completing talks in Kiev on a loan that Shlapak told reporters would amount to between $15 billion and $20 billion. Ukraine’s economy will contract 3 percent this year, the minister said.
The G-7 remains ready to intensify actions, including coordinated sanctions that would have “an increasingly significant impact” on Russia’s economy if the authorities in Moscow escalate the situation, the group said in a statement after a meeting in The Hague yesterday.
With yesterday’s move, the G-7 -- the U.S., Germany, the U.K., France, Italy, Canada and Japan -- reverted to its Cold War-era format, suspending what became the G-8 in 1998 when Russia was welcomed in. The group was all smiles around a Putin-less conference table in a photo posted on Twitter by European Commission President Jose Barroso, who attended along with EU President Herman Van Rompuy.
U.S. and European warnings focused on potential military moves by the Kremlin into Russian-speaking areas of eastern and southern Ukraine, leaving open whether the two hope to dislodge Putin’s forces from Crimea, a Black Sea peninsula dominated by Russia since the 18th century.
“We will not accept this kind of behavior,” European Commission President Jose Barroso said today in an interview with Bloomberg Television in The Hague. “There is a heavy price to pay if this kind of behavior continues.”
The U.S. has imposed asset freezes and visa bans on 31 Russians, Ukrainians and Crimeans, including political and business figures close to Putin. The 28-nation EU has put 51 people on its blacklist, including some on the U.S. roster, while stopping short of punishing businesspeople.
“The current sanctions are still too little to matter, but that’s not by accident -- it’s by design,” said Fredrik Erixon, director of the European Centre for International Political Economy in Brussels. “The EU and U.S. are sitting on weapons of mass destruction when it comes to Russia’s economy. The U.S. and EU are laying out possible step-by-step economic sanctions that will start rolling into place if Putin doesn’t behave.”
Net capital outflow from Russia is forecast at $65 billion to $75 billion in the first quarter of the year, Deputy Economy Minister Andrey Klepach said yesterday. That would be more than the $63 billion recorded for the whole of last year.
A Russian incursion into other parts of Ukraine would be the most likely trigger for wider sanctions that could cover Russia’s energy, banking and finance industries, as well as weapons procurement, an Obama administration official told reporters on condition of anonymity.
European governments are debating the costs of snubbing Russia. Banking curbs would hurt Britain, an arms embargo would bar France from selling Mistral-class helicopter carriers to the Kremlin, and cutbacks in purchases of Russian gas would harm a swathe of EU countries, starting with Germany.
Russia wants Ukraine to adopt a federal constitution that guarantees political and military neutrality, grants powers to Ukrainian regions and makes Russian a second official language. In a nod to those concerns, the G-7 urged Ukraine to undertake “broad-based constitutional reform, free and fair presidential elections in May, promotion of human rights and respect of national minorities.”
Putin sent Foreign Minister Sergei Lavrov to The Hague for the 53-nation summit on the security of the world’s stockpiles of nuclear fuel being attended by the G-7 leaders. Lavrov told reporters that Russia isn’t “clinging” to the G-8 format, viewing the wider G-20 as the best forum for discussing global issues.
Russia is interested in continuing contacts with G-8 members, Dmitry Peskov, Putin’s spokesman, said today, the Interfax news service reported.
G-7 foreign ministers will also skip a Moscow meeting in April, the G-7 said in the statement. A G-7 energy ministers’ meeting will explore ways to diversify Europe’s energy supply in order to blunt the cost of imposing sanctions, the U.S. official said.
“This group came together because of shared beliefs and shared responsibilities,” the G-7 said. “Russia’s actions in recent weeks are not consistent with them.”
To contact the reporters on this story: James G. Neuger in The Hague at firstname.lastname@example.org; Julianna Goldman in The Hague at email@example.com; Daria Marchak in Kiev at firstname.lastname@example.org