Russian stocks and the rouble bounced this week as Russia's president Vladimir Putin appeared willing to help broker peace in eastern Ukraine. He laid out a seven-point ceasefire plan, including an international monitoring force.
In the previous few days, the rouble had hit a record low against the dollar after more Russian troops were sent to Ukraine. The renewed incursion prompted the EU to consider tougher economic sanctions against Russia.
This week's relief over the ceasefire news was tempered by reports of ongoing explosions in the eastern city of Donetsk.
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This would entrench the "status quo of a Ukraine unable to become economically or politically successful, the endgame the canny Russian president has sought all along".
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As for further sanctions, Putin knows not to expect anything significant, added Hulsman. "Iran-style sanctions" would send a fragile Europe into recession, given its dependence on Russian oil and gas.
However, the sanctions seen so far, along with Russian retaliatory measures, are "beginning to weigh" on the Russian economy, said Chris Weafer of Macro Advisory. Russian banks that have trouble getting loans from Western sources turn to the Russian central bank, which has had to put up interest rates to stem capital outflows.
As credit gets pricier, consumers have more trouble servicing debts and thus also tighten their belts.
At the same time, the fall in the rouble and banned fruit imports, a response to Western sanctions, are raising prices for consumers. Car sales were down by 23% year-on-year in July.
Russia's decade-long consumer boom appears to be drawing to a close, while investment is barely growing, Capital Economics pointed out. Improving investment is crucial to raising the country's growth potential, and the foreign expertise required to do so is now even less likely to be forthcoming. The economy is flirting with recession.
Patience could give the West the upper hand here, said Hulsman. The Kremlin may be willing to shrug off a recession for now. "But how will the Russian people feel" in three years or in six?
