Euler Hermes Sees Russia Scarred for Years by Ukraine

Russia will suffer the economic and political fallout of the Ukraine crisis for years to come, according to Euler Hermes Group, the world’s biggest trade credit insurer.

Euler Hermes expects Russia’s economy to contract 5.5 percent this year and 4 percent in 2016, said Ludovic Subran, chief economist at the Paris-based company. While the insurer doesn’t expect Europe and the U.S. to tighten sanctions further, the weak ruble and a projected 30 percent increase in insolvencies will help deter investors and encourage capital flight, he said.

“Our core scenario is that we won’t escalate the sanctions further but the economic crisis is here to stay,” Subran said in an interview Thursday in Berlin. “It will take years for Russia to get back their reputation.”

The U.S. and Europe are maintaining the threat of further sanctions unless the terms of a cease-fire between pro-Russian separatists and Ukrainian forces are upheld. The penalties are heaping further pressure on an economy sliding into its first recession in six years after the standoff over Ukraine helped stoke Russia’s biggest currency crisis since 1998.

The standoff has hurt European industries including the food sector in France, the financial industry in London and foreign direct investments in the Netherlands, where many Russian companies have their European headquarters, Subran said.

German Cars

Exports to Russia from “the West” have dropped by 60 billion euros ($66 billion) to 80 billion euros since the start of the crisis, with sales of appliances, cars, textiles and pharmaceuticals disappearing “into thin air,” he said.

“The German car industry has been especially hit,” Subran said. “We expect car registration in Russia to go down by 12 percent this year and production to drop 27 percent.”

That’s also why tighter sanctions, for example preventing Russians from using their international credit cards, aren’t necessarily in Europe’s interest, Subran said.

“If we were to enter a full-sanction package, we’re talking about a 100 percent increase in insolvencies, a recession of 10 percent and not five percent, we’re talking about major collateral damage in terms of euro growth,” Subran said. “So far, most of the impact has been absorbed.”

Before it's here, it's on the Bloomberg Terminal.