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Ukraine Crisis

Russian Sanctions Show Their Bite, Effects Likely to Deepen

Image: Crisis in Ukraine

Crimean people exchange money for Russian Ruble at an exchange booth of Bank of Russia in Sevastopol, Ukraine on March 24. EPA

The sanctions imposed by the West against Russia over its annexation of Crimea are already taking a bite out of the Russian economy, and those effects are likely to deepen in the coming months.

The first round of sanctions announced in March were thought by some to lack teeth, but the second round of measures imposed against Russian holdings seems to have had a much farther-reaching impact. Visa and MasterCard have stopped providing services for clients at the two Russian banks, Rossiya and SMP, that have already been targeted by sanctions.

Patriotic Russians have opened accounts at Bank Rossiya in response to the sanctions, according to Yuri Kovalchuk, the bank's chairman and one of the influential Russians targeted by sanctions.

Meanwhile, targeted trade bans, which are likely to be the next phase of sanctions, have not happened, but many companies seem to be behaving as though they are.

"We're not getting responses to calls or emails on deals that are supposed to close within weeks," one source at a Russian company told CNBC, speaking about Western companies from which they buy goods.

While the current sanctions are a thorn in Russia’s side, they also serve as a reminder that any further actions could have serious economic consequences.

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"The actions taken by the US/EU bring Russia to the outer limit of the 'inconvenient' sanctions," Chris Weafer, senior partner at Moscow-based firm Macro-Advisory Ltd, said. "Any additional sanctions are likely to cross into the trade and economy disruption category. It is that threat which is now of greatest concern to investors and the business community."

"There have also been numerous anecdotal reports of orders for goods and services to and from Russia being canceled and of a number of financial transactions being halted or at least delayed," said Stephen Leach, an emerging market economist at Citi.

There are growing concerns that Western jobs are now at real risk if sanctions continue or are increased. Companies like Boeing, which uses Russian titanium, or General Electric, which leases aircraft to Russian airlines, may see profits dented by sanctions.

"If it comes to [further] sanctions everybody involved in international commerce where Russia, and areas around Russia, and even Europe is involved will be affected to a large or smaller extent."

A series of meetings between the G7 nations -- Canada, France, Germany, Italy, Japan, the United Kingdom and the United States -- this week in Europe and Ukraine is expected to further raise tensions.

Germany, one of Russia's closest European trading partners with more than 6,000 businesses engaged in Russia, has adopted a harder line on the sanctions than some observers thought they would. The government last week indefinitely suspended a planned 100 million euro ($140-million) contract for German defense group Rheinmetall to build a training camp for Russian forces.

Russia's Deputy Defence Minister Anatoly Antonov called the decision "unconstructive" and "canceling out the positive trends developed in recent years," according to Interfax, the Russian news service.

Germany's main trade body warned that further economic sanctions would be a "real catastrophe" on Friday.

The impact of the Western sanctions on Russia and Ukraine's economies will not be clear for weeks, until economic data from when the escalation in tensions began is released. However, economists have rushed to downgrade their 2014 growth forecasts for both economies.

"Any additional sanctions are likely to cross into the trade and economy disruption category. It is that threat which is now of greatest concern to investors and the business community."

Within Russia, there are major concerns about the impact the sanctions will have on consumer and business confidence, and about money being taken out of the country and invested elsewhere. Investors with more stomach for risk should look at Novatek, Megafon and CTC Media, according to Weafer. All have seen their share prices hit by concerns about sanctions against major investors, but are fundamentally good businesses, he argued.

Around $45-50 billion was taken out of the country in 2014 up until the middle of March, according to Goldman Sachs, the bank charged with restoring Russia's image internationally, compared to $63 billion in the whole of 2013.

In the West, the tens of thousands of companies with Russian links may just have to grin and bear it.

Nils Andersen, chief executive of Danish shipping company Maersk, told CNBC on Monday that more sanctions could cause an economic ripple effect to extend to Europe.

"If it comes to [further] sanctions everybody involved in international commerce where Russia, and areas around Russia, and even Europe is involved will be affected to a large or smaller extent,” Andersen said. “We just hope that the sanction will be reasonable if any and we will have to find solutions."