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Sanctions and S&P may spoil Russia's Crimean party

Increased sanctions against Russia and its credit rating being put on negative watch, announced Thursday, were already making their impact felt Friday morning.

The MICEX, Russia's benchmark stock index, fell over 3 percent after the U.S. added more individuals and Russia's Bank Rossiya to its list of those targeted by sanctions and two Western credit agencies changed their outlook on Russia's credit rating to negative from stable.

(Read more: Ukraine: What next for battered economy?)

Bloomberg contributor | Bloomberg | Getty Images

The sanctions led to Visa and Mastercard halting services to Bank Rossiya, a harbinger of what could result if more banks or other Russian companies are threatened. U.S. President Barack Obama also threatened to target Russia's prized natural resources, even if it had broader economic consequences, which could seriously hinder Russian economic recovery.

"The second round of U.S. sanctions yesterday ripped around Putin's inner circle and were very strong in terms of messaging in terms of indicating that they "know" the financial channels which support the country's elites," Timothy Ash, head of emerging markets research at Standard Bank, said.

(Read more: S&P downgrades Russian outlook)

Fitch and Standard and Poor's assessment of the dangers facing the Russian economy may be dismissed by the Russians as Western propaganda. Russian Deputy Finance Minister Alexei Moiseev said that the S&P move was based on "nothing."

Still, the move could lead to rising cost of repaying its debt for Russia, which would dent an already tentative recovery.

"Heightened geopolitical risk and the prospect of U.S. and EU economic sanctions following Russia's incorporation of Crimea could reduce the flow of potential investment,trigger rising capital outflows, and further weaken Russia's already deteriorating economic performance," S&P argued.

What might be more concerning for Russia is that Russian investment firm Renaissance Capital, usually one of the more positive voices on the Russian economy, downgraded its forecasts for economic growth for 2014 from 3.3 percent to 1.6 percent. The country's gross domestic product will shrink in the first quarter rather than growing, according to Renaissance's leading indicator. And their projections are based on the assumption that an agreement will be reached soon on Ukraine's future.

(Read more: EU ready to step up sanctions on Russia)

"We believe a compromise on Ukraine will be found sooner or later, and that increased sanctions against Russia are unlikely," its economists argued.

Since the crisis in Ukraine erupted, Russia has seen a plummet in the value of its currency, investors yanking their money out of its stock market and downgrading of its growth prospects. With further sanctions on the cards, the party in Crimea may be followed by a horrible hangover.

- By CNBC's Catherine Boyle. Twitter: @cboylecnbc.

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