Fragile economy stays Putin's hand in stand-off with U.S.

By Alexander Winning

MOSCOW (Reuters) - Russian leader Vladimir Putin is unlikely to risk an escalating round of tit-for-tat sanctions with Washington because the only measures that would hurt the United States would also endanger Russia's fragile economic recovery.
Russia last week ordered Washington to cut 755 of its 1,200 embassy and consular staff and said it was seizing two diplomatic properties, after U.S. lawmakers backed a new round of economic sanctions on Moscow.
Though an eye-catching gesture, Russia's response does not pack the same punch as the U.S. penalties, which target Russian energy projects, make it harder for U.S. President Donald Trump to ease earlier sanctions, and could further restrict lending to Russia.
That partly reflects the fact that Russia has relatively few ways of hurting the United States, whose economy is around 14 times larger than Russia's.
It also reflects worries in the Kremlin about the health of the economy ahead of a presidential election in March.
In 2014, when the United States and European Union imposed an earlier round of sanctions over Moscow's annexation of the Crimea peninsula from Ukraine, the Kremlin's main response was to limit Western food imports, a comparatively soft measure.
"It was a case of the head overruling the heart and I expect exactly the same response this time," said Chris Weafer, senior partner at Macro-Advisory consultancy in Moscow. "Something which will cause some discomfort for the U.S. but which will not derail the Kremlin's efforts to attract international investors and grow the economy."
Weafer said Putin would probably take further retaliatory steps against Washington after Trump signs the new sanctions into law but he did not think the Kremlin would target U.S. firms with close ties to Russia.
Putin has not said whether he will fun for a fourth presidential term in 2018, but officials expect him to do so.
Whereas Putin oversaw several years of growth above 5 percent in his early presidential terms, the Russian economy contracted in 2015 and 2016 and is seen growing only 1.4 percent this year.
Putin needs a strong economy if he is to win a convincing mandate, and the Kremlin has tried to show that Russia is open for foreign business despite tensions with the West.
Domestic Russian investors have only cautiously increased investment as the economy has recovered from recession, making foreign inflows more important.
An adviser to Putin, ex-finance minister Alexei Kudrin, told Reuters last week that domestic investors needed certainty that sanctions would not continue to be ratcheted up, otherwise the economic outlook would be weak.

RESTRICTING COOPERATION
Putin said in an interview aired on state TV on Sunday that Russia could restrict cooperation with Washington in "areas which would be sensitive to the American side" but he did not think that was yet necessary.
"That would not only hurt Russian-American relations, it would also inflict some damage on us," Putin said.
Analysts cite energy and aviation as two sectors where Russia and the United States work closely and where Russian penalties could affect U.S. firms.
U.S. energy giant ExxonMobil is a partner of Russian oil firm Rosneft in the Sakhalin 1 project off Russia's far east coast and has agreed to team up with Rosneft in North America and Mozambique.
Russia's VSMPO-Avisma, the world's largest titanium producer, supplies up to 40 percent of U.S. planemaker Boeing's titanium under long-term contracts, and the two firms have a joint venture in Russia.
In both cases, however, Putin is unlikely to bow to pressure from hawks in his administration and sever business ties.
Russia wants access to the technological know-how of firms like Exxon to help it maintain production of oil, its chief export, close to post-Soviet highs. It is also trying to revive its domestic aviation industry, which Boeing can help.
"What foreign investment does is that it not only brings money, it brings intangible benefits in terms of better management, knowledge, transfers of technology and that helps to raise productivity and living standards," said William Jackson, senior emerging market economist at Capital Economics.
Putin, who built his high approval ratings on the rapid rise in Russians' living standards during his first two terms, will be conscious of this when deciding on any further retaliation.
"So far Putin has been a lot more measured in his response than the demands of the nationalists," Weafer said.
For all his power, Putin "sleeps with one eye on the voters", Weafer added.


(Additional reporting by Natalia Shurmina and Elena Fabrichnaya; editing by Giles Elgood)