World Economy

Putin’s Cold War to scare away investment in 2015

Adem Altan | AFP | Getty Images

Russia's hostility towards Ukraine and the West could wreak further havoc on its economy over the coming year, according to a new report, which categorized the country as "high risk" for investors.

Russia's "increasingly aggressive foreign policy" saw the country ranked 21st in Verisk Maplecroft's Political Risk Dynamic Index for 2015, behind countries such as North Korea at number 15 and Somalia at number 1.

Western sanctions against Russia following its annexation of Crimea have hit both its corporations and its currency hard, weakening the country's economic outlook. On Tuesday, the World Bank revised down Russia's growth projections for 2015/2016.

It now predicts that the Russian economy will contract by 0.7 percent in 2015, with additional difficulties caused by continued volatility in international oil prices.

Where now for the Ruble?
Where now for the Ruble?

Daragh McDowell, a senior analyst at Maplecroft, told CNBC that three factors were holding back Russia's economy and discouraging foreign investment: ""Vladimir Putin, the price of oil and the ruble's exchange rate".

And things could get worse, according to Maplecroft. "As Russia's economic situation deteriorates, there is a high risk that the Putin government will attempt to maintain its authority and popular support by triggering external conflicts," the political risk consultancy said in the report.

However, McDowell added that Russia could present a buying opportunity for some investors. "Some investors think high risk can lead to high reward," he said.

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Russia PM talks sanctions, economy
Russia PM talks sanctions, economy

Marcus Svedberg, chief economist at East Capital, told CNBC that although the Russian economy looked bleak, it was not necessarily fragile.

"Reserves are ample, debt is relatively limited, and unemployment is historically low and there is no sense of panic or stress in Russia," he told CNBC.

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Ukraine suffers

It's not just Russia that has suffered from Putin's actions over recent months, with Ukraine being hit too.

Ukraine experiencing the biggest deterioration in the Dynamic Political Risk Index, moving from 82nd to 20th place, according to Maplecroft. The firm said the country was "high risk", following the overthrowing of President Viktor Yanukovych in February and the ongoing conflict with Russia.

Ukraine's $15 billion black hole
Ukraine's $15 billion black hole

"While the conflict in the east is the pre-eminent issue driving political risk in Ukraine at present, businesses operating in the country face an array of other challenges," the report said. It highlighted that Ukraine was at "extreme risk" with regards to both corruption and its macroeconomic outlook.

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"The risks arising from corruption and the perilous state of the economy in particular have the potential to drive a further destabilisation of the country in 2015 and beyond," Maplecroft said.

Maplecroft applied 54 risk measures (such as governance and terrorism) to each country, before ranking each according to the risk they pose to investors, from "low risk" to "extreme risk".

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