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Russian Economy Hammered by Massive Money Drain

/ Source: CNBC.com
Image: Russian President Vladimir Putin chairs Russian government meeting at Novo-Ogaryovo residence outside Moscow
Capital is fleeing Russia as President Vladimir Putin considers his next move into Ukraine.RIA Novosti via Reuters

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While Russian President Vladimir Putin plots his next move into Ukraine, capital is fleeing Russia.

Russia's central bank this week confirmed that some $64 billion in assets held by Russians headed for the exits in the first three months of this year — roughly matching the total for all of 2013. That amounts to roughly 12 percent of Russia's gross domestic product.

The hemorrhaging is expected to continue if the turmoil in the Ukraine continues. Officials at the World Bank have warned that Russia could watch another $150 billion in capital leave the country if the crisis deepens. Since 2008, nearly half a trillion dollars has fled the country.

As the money flowing out of Russia surges, the upheaval in Ukraine has put a damper on investment coming into the country. The cash squeeze comes as Russia's economy is barely growing, inflation is rising fast and the central bank has been forced to raise interest rates to prop up a sagging ruble.

Earlier this week, Russia's Economy Ministry predicted that GDP growth could slow to around 0.5 percent — from 1.3 percent last year.

The U.S. and Western countries seeking to thwart Putin's Ukrainian ambitions have threatened economic sanctions if the Russian aggression continues. So far those have been limited to freezing the holdings of a handful of Putin's political allies.

"The Achilles' heel of the Russian economy remains the flow abroad of Russian capital following any shock," Goldman Sachs analysts Clemens Grafe and Andrew Matheny said in a recent note. "We would also think that any sanctions or even the threat of sanctions will be ultimately targeted at these flows."

But Western leaders' tough talk of wider asset freezes and threats of broader economic sanctions are complicated by Europe's dependence on Russia for roughly 30 percent of its natural gas demand supplies, half of which flows through Ukraine.

Putin played that trump card again Thursday, warning European leaders that the Kremlin would cut natural gas supplies to Ukraine if it did not pay up on a $2.2 billion gas debt.

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