WESTERN measures against Russia—asset freezes and visa restrictions aimed at people and firms close to Vladimir Putin—may be pinpricks, but the crisis in Ukraine has already taken its toll on Russia’s economy and financial markets. Capital flight in the first three months of 2014 is thought to exceed $60 billion. The stockmarket is down by 20% since the start of the year and the rouble has dropped by 8% against the dollar. Worries about the devaluation feeding through to consumer prices have prompted the central bank to yank up interest rates, from 5.5% at the start of March to 7.5%. The IMF reckons the economy is in recession; this week it cut its growth forecast for 2014 from 1.3% to 0.2%.

Despite these upsets, Russia appears to hold strong economic as well as military cards. It provides 24% of the European Union’s gas and 30% of its oil. Its grip on Ukraine’s gas and oil consumption is tighter still. That makes it hard for the West to design sanctions that do not backfire.

Russia’s public finances are also much healthier than those of many of the countries against which it is pitted over Ukraine. The budget deficit was 1.3% of GDP last year, whereas it stood at 3.3% for the EU. Government debt amounted to a mere 13% of GDP, compared with 87% in the EU.

Among emerging economies, Russia appears to have stout defences to withstand external pressure. New estimates of GDP evaluated at purchasing-power parity exchange rates from the World Bank (see article) show that in 2011 it was the sixth-biggest economy in the world on this measure, only just behind Germany. Thanks to its huge energy exports, Russia’s current account is in surplus, forecast by the IMF to be 2.1% of GDP in 2014. In contrast countries like Turkey and South Africa, which took a battering earlier this year as investors worried about fragile emerging economies, are projected to run deficits of 6.3% and 5.4% respectively.

A long history of such surpluses has enabled Russia to amass impressive foreign-exchange reserves, which stood at $486 billion in March. According to the IMF these reserves are four times as high as its external-financing requirement—the rollover of external debt less the current-account balance—in 2014. Turkey’s reserves cover only half of its requirement.

Despite these strengths, however, the Russian economy is far from invulnerable. Not all the reserves are available for intervention, since $175 billion are earmarked in two wealth funds which cushion the budget and cover future pension spending. If capital flight continues at its current rate, the central bank will face a harsh choice: it can either expend its reserves to keep the rouble stable or allow the currency to drop, which will add to inflation and could precipitate a domestic banking crisis.

The risk posed by capital flight is all the more acute because the economy is already ailing. The long boom that once seemed to justify its inclusion in the BRICs—a group of big, fast-growing emerging economies whose other members were Brazil, China and India—is over. In the decade until the financial crisis of 2008, Russian output raced ahead at an average 7% a year, boosted by surging oil and gas prices. But the recovery after the 2009 recession was less impressive, with growth averaging 4% in 2010-12. Even before the IMF’s gloomy revision, growth had already slowed to a crawl (see chart). While growth has slowed in the past 18 months, inflation has stayed high. Though the falling rouble contributed to the recent rise to 6.9% in March, a more fundamental reason why inflation remains a problem is that the economy is operating at full capacity. The labour market is tight, with the unemployment rate just 5.4%. Russia’s decade of outperformance was possible in part because the preceding collapse after the demise of communism was so extreme. That left ample spare capacity to be brought back into use. Eliminating former wasteful methods of production and applying modern technologies and managerial techniques provided further scope for a sustained burst of rapid catch-up growth. But just as the commodity boom has ended, the easy gains in output have also been exhausted. Future advances will be harder, requiring sweeping reforms. Small and medium-sized firms account for only a quarter of Russian employment compared with half, on average, among countries belonging to the OECD. If these smaller enterprises are to flourish, Russia needs to become a more competitive place instead of one where big state-owned companies hold sway. Russia also lags behind in innovation, which is vital for long-term growth. Above all it is held back by corruption and the lack of the rule of law.

If there is to be a sustained rebound in potential growth Russia must open up its economy still further, especially to inward investment by foreign firms that introduce new ways of doing things and put pressure on dozy domestic companies. Instead the economy is turning in on itself as a result of the crisis in Ukraine.

A survey of Russian business by MNI, a research firm, showed a sharp drop in orders from abroad in April. Russia makes (rather than extracts) little the rest of the world wants to buy. Standard & Poor’s has recently lowered the country’s credit rating to just one notch above junk. For all Mr Putin’s apparent self-confidence, a sick economy weakens his hand and makes Russia more vulnerable to sanctions.