How Well Are Russia Sanctions Working?
(Russia Matters – russiamatters.org – Nick Butler – December 21, 2018)
Nick Butler is an energy commentator for the Financial Times and a visiting professor and chair of the Kings Policy Institute at Kings College London. He spent 29 years with BP, including five years as group vice president for policy and strategy development.
Tracking sanctions against Russia has become a full-time job. Since early November Russia watchers have been anticipating a new batch of restrictions that promise to be “more draconian” than before: This latest wave is to crash down on Moscow not for its 2014 annexation of Crimea, or for the ensuing bloodshed in Ukraine, and not for interference in U.S. politics, but in response to the attempted poisoning of former Russian spy Sergei Skripal in the English city of Salisbury. For now, the promised sanctions seem to be in a holding pattern until 2019. Meanwhile, new ones have quietly been rolling in for Russia’s Crimean adventure and human rights abuses. And this month the U.S. Congress passed a bipartisan resolution arguing against a long-planned Russian gas-pipeline project in Europe. With the end of the year upon us, this is as appropriate a moment as any to ask how well U.S. sanctions are working.
Short-Term Aims Clear, Visible Impact Less So
Among the dozens of different pieces of legislation that support the current sanctions against Russia, some spell out their objectives with clarity. They aim to make Moscow uphold its commitment to Ukraine’s sovereignty and territorial integrity and stop “improper activities” in Crimea and elsewhere, to counter malicious cyber activities, to staunch the flow of arms to Syria and to curb Russian human rights abuses, among other things. The newest, Skripal-related sanctions, meanwhile, are meant to push Russia into restating its commitment not to use chemical or biological weapons.
On any literal standard the sanctions are clearly not working: Russia remains in undisputed control of Crimea and a low-level conflict continues in eastern Ukraine, with occasional flare-ups; Russian cyber incursions have not ceased and, indeed, have invited U.S. responses other than sanctions; Moscow’s military and “geostrategic” significance in Syria remains immense (especially after this week’s surprise announcement about a U.S. pullout) and its human-rights abuses newsworthy. Even the expected new round of Skripal-related sanctions underscores Moscow’s refusal to be cowed by the first round, which came into force in August.
Moreover, though the sanctions are meant to inflict economic pain, their impact on Russia’s economy has been far from catastrophic. The World Bank’s latest country report, released this month, noted “modest” growth prospects for 2018-2020 but also said that, with the right government initiatives, the growth rate could be doubled to 3 percent by 2028 and poverty could be halved by 2024. Over the last year, Russia’s economy and public finances have been much helped by the increase in international oil prices. Western companies, including U.S. enterprises such as Exxon Mobil, have maintained their investment in Russia and have been instrumental in pushing Russian oil output up to the highest level seen since the collapse of the Soviet Union more than 25 years ago. At an average 10.8 million barrels per day Russia once again managed to capture the title of world’s leading oil producer this year (though it seems to have lost it since to the U.S.), with exports of 5 million barrels a day.
Even in terms of economic deterrence, not all the threats of sanctions are taken seriously. Chairing a session at Europe’s major gas conference in Berlin last month, I asked the audience if they thought the Nord Stream 2 project—Gazprom’s new 55-bcm-capacity export line across the Baltic to northern Germany—would be delayed either by legal action within the European Union or by U.S. sanctions. As of October, construction was due to be completed on schedule, by the end of 2019, with gas starting to flow in 2020 and ramping up to a point at which supplies currently sent to Europe through the Ukrainian pipeline system will no longer be needed. That will deprive Ukraine of significant and much needed revenues. Trump has been a vocal opponent of the pipeline; his administration has explicitly threatened sanctions against the companies involved with Nord Stream 2 and the legislation now in place provides the basis for action. However, in a room of 150-200 gas industry executives and analysts only two believed that there would be any delay to the project, and talk of U.S. sanction threats against major players such as Shell was greeted with laughter. Last week, the U.S. House of Representatives passed a bipartisan resolution opposing the pipeline, but it is non-binding.
The perception of some sanctions as empty threats, however tough the measures may seem on paper, is reinforced by the fact that existing oil and gas investment in Russia has not been affected. Partnerships between major international energy companies and leading Russian players such as Rosneft and Gazprom remain in place, despite years of sanctions that could have been used to target high-tech oil projects and, as of 2017, export pipelines. While sanctions have deterred Western companies from going into new projects, press reports suggest that several majors, including Shell, are still involved in active negotiations around potential new deals—presumably on the assumption that sanctions will sooner or later wither away as events move on and the original causes fade from memory. (This week’s decision to lift U.S. sanctions against companies controlled by Russian aluminum mogul Oleg Deripaska only serves to bolster that impression.)
Taking the Long View
All this could suggest that sanctions are a complete failure, used only as a way of signaling disapproval and satisfying short-term demands for “action.” That interpretation, however, is too uncharitable. Sanctions that leave existing commercial activity in place do not bring instant pain to the targeted country, but they do have the effect of creating isolation and imposing costs that become evident over time. In a November study, Bloomberg Economics found that sanctions had become a “bigger culprit” behind Russia’s economic underperformance over the past four years than low oil prices, with the economy “more than 10 percent smaller compared with what might have been expected at the end of 2013.”
Moreover, the true purpose of the sanctions seems to be broader than their stated objectives—namely, it is to restrain all sorts of unwanted future Russian behavior, not just to deter aggression in Europe or impose penalties for past actions. In fact, it would be hard to find anyone in Europe or the U.S. who expects Crimea to be handed back to Ukraine or believes that Russia will actually give up its ability to produce chemical weapons. Nor do many reasonable Westerners want to see an end to Russian energy exports. The real concern is to ensure that Moscow understands that it has crossed a line of acceptability in its actions and that such steps are not cost-free. As the head of the British spy agency MI6 recently put it in regard to attacks on British soil, the “intention is for the Russian state to conclude that, whatever benefits it thinks it is accruing from this activity, they are not worth the risk.”
The new measures to be imposed by the Trump administration under the Chemical and Biological Weapons Control and Warfare Elimination Act could include further restrictions on bank loans, further export prohibitions (exports of some dual-use technologies have already been banned), import restrictions, suspension of diplomatic relations and termination of air-carrier landing rights. While some of these lack credibility because they would do damage to the U.S. and its allies, others are highly credible and can be imposed at little or no cost.
Like earlier sanctions, the Skripal-related measures are specifically designed to further stoke uncertainty among investors and choke off new flows of capital and technology to Russia. Even the anticipation of the new sanctions is designed to cause cautious corporate lawyers to advise against any actions that could put companies in jeopardy or create future risks. Extraterritorial action of this sort is very unpopular among international companies, but most have business in the U.S. and few can ignore the risks involved. (In the business world, memory of the 2015 judgment against the French bank Paribas—forced to forfeit $8.9 billion for violating U.S. sanctions against Cuba, Sudan and Iran—is still strong.)
The manner of implementation adds another layer of uncertainty. Numerous additional measures have been proposed by members of Congress who do not believe that the existing sanctions are sufficient, and with the Democrats’ midterm victory this trend is likely to accelerate. In September, U.S. Secretary of Interior Ryan Zinke (who will be stepping down at the end of this year) reportedly said that America had the ability to halt exports of Russian oil and gas with the use of military force, including a naval blockade. Companies might consider that unlikely, but the uncertainty itself is making them think twice about future deals.
Eventually all this will weaken the Russian energy sector and therefore, given its role in the economy, will sap the finances of President Vladimir Putin and his government as well. The Russian oil and gas industry is still technically weak: The recent growth in oil output would have been impossible without Western technology and the high output cannot be maintained without continuing Western investment in new projects. The inability to modernize and diversify the Russian economy is Putin’s greatest failure and Russia’s greatest vulnerability. Sanctions, if applied successfully and sustained for long enough, will undoubtedly undermine the relative economic successes upon which Putin depends for his authority and ultimately his position in power.
This leads to another dimension on which sanctions should be judged: their impact on the balance of power within Russia and the level of domestic support for any future aggressive action by Putin. A number of the measures proposed are clearly designed to separate the Kremlin from the oligarchs and other members of the financial community who have done well in Russia over the last two decades and whose support is crucial for Putin. Provisions included in the 2017 Countering America’s Adversaries Through Sanctions Act, known as CAATSA, target individuals and Russian-controlled companies and thus have destabilized those who assumed that because of their wealth they had become part of the global elite. Some sanctions-related steps have sent a tremor through the community of Russian expatriates and globetrotters, many of whom live in the hope of acquiring citizenship in Western countries. Such measures include the publication of an “oligarchs list” identifying those being targeted by the U.S. because of their purported links to the Putin administration, the exclusion of some prominent Russians from the World Economic Forum meeting in Davos1 and British policy changes making it difficult for oligarchs such as Roman Abramovich, owner of one of London’s leading soccer teams, to secure a British visa.
The realization among the Russian business community that their interests and Putin’s might not be fully aligned is an important step in forcing a change in behavior, though what that change will be is not yet clear. On one hand, the Russian president’s power, in common with every other world leader, ultimately depends on maintaining the support of key groups. On the other, Russia has developed a formidable system of sticks and carrots to ensure loyalty among business elites, and some analysts have argued that sanctions have merely forced oligarchs and the Kremlin closer together by making them ever more dependent on each other.
In modern diplomacy sanctions have become more important than military action, which is costly and clumsy. Sanctions are best when they impose a growing and cumulative burden on the target country and create divisions within that country’s power structures. Sanctions are not designed to deliver instant gratification; their impact, and the threats they put in place are intended to change the calculations of opponents over time. In the case of Russia, many factors will determine how this plays out, from the price of oil to the changing strategies of powerful Russian stakeholders, from the Kremlin’s ability to keep playing its weak hand strongly to China’s impact on Russia’s economy and global clout. Indeed, perhaps a key determinant of the sanctions’ success, as suggested in these pages a year ago, will lie in Washington’s ability to better define its own strategic objectives.
- These businessmen have reportedly been allowed to attend since the initial decision to keep them out but under conditions so restrictive that it is not clear whether they will be able to meet them.
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