- Associated Press - Friday, July 25, 2014

MOSCOW (AP) - Having for months dismissed Western sanctions on Russia as toothless, business leaders here are now afraid that the downing of the Malaysian jetliner will bring about an international isolation that will cause serious and lasting economic damage.

Throughout the Ukrainian crisis, U.S. and European sanctions had mainly targeted a handful of individuals, sparing economic ties. Then last week the U.S. imposed penalties on some of Russia’s largest corporations. And when the airliner was shot down just a day later in Ukraine, allegedly by separatists with Moscow’s support, concern grew in Russia that the sanctions would only get worse as President Vladimir Putin shows little sign of cooperation.

Reinforcing those concerns, the European Union said Friday it is planning newer, tougher penalties on businesses.

“Over the past few months, there was a sense that Mr. Putin acted decisively, forcefully, and correctly, and that everybody else in the world would accommodate themselves to that reality and we’d get back to something like business as usual,” said Bernard Sucher, a Moscow-based entrepreneur and board member of Aton, an independent investment bank. “Now we’re talking about real fear.”

It’s not clear how quickly that fear and the country’s overall economic pain might soften Putin’s foreign policies. He keeps tight control over business leaders and still enjoys a high popularity rating. But some analysts note the fear of tougher sanctions may in fact already be having an impact, for example by keeping Russia from trying to annex eastern Ukraine the way it did with Crimea in March.

After that move, which triggered a deep freeze in relations with the West, stock markets in Russia dropped only to later rebound as investors understood the country’s trade relations would remain largely unscathed. Europe, which is in frail economic health, dared not block energy imports from Russia or the trade in goods such as cars. Oil companies like BP and ExxonMobil continued their operations in Russia, with some even signing new deals.

The U.S. took a tougher stance, but until last week was also careful to limit sanctions to asset freezes on individuals who were perceived to have had a hand in destabilizing Ukraine.

On July 16, the night before the Malaysia Airlines jet was shot down, Russian markets appeared to have fully recovered, with the MICEX stock index adding 23 percent since March 1.

Then last week, the U.S. announced new sanctions that had investors in Russia fear a turn for the worse. The U.S. shut off its financial markets for a broad swath of defense companies as well as Russia’s largest oil company, Rosneft, gas producer Novatek, which is half-owned by a close Putin ally, and a major bank, VEB. The move offered business executives a glimpse of what they had thought would never happen: serious international isolation.

According to Alexis Rodzianko, president of the American Chamber of Commerce in Russia, those sanctions were the first to really pack a punch because they were “broader and more specific: they went beyond the symbolic.”

Rodzianko said anecdotal evidence suggests some investment decisions were delayed, “particularly when people were just considering coming in to the market.”

When the Malaysian airliner went down one day later, investors worried conditions would deteriorate further.

The stock market has fallen over 6 percent since Thursday last week. Investors keep pulling money out of the country. They withdrew $74.6 billion in the first six months of the year, a figure forecast to reach $100 billion for the whole of 2014 - almost twice the $60 billion in withdrawals seen last year.

Growth, meanwhile, is nose-diving. The International Monetary Fund this week slashed its forecast for 2014 from 1.3 percent to 0.2 percent. And the currency is unstable - Russia’s central bank on Friday raised its key interest rate by half a point to 8 percent, saying the heightened geopolitical risks are putting pressure on the ruble.

Even the world of sports has been drawn in. FIFA, the governing body for world soccer, faced calls from German lawmakers to move the 2018 World Cup from Russia, but swiftly rejected the notion.

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