Western Sanctions Against Russia: Means and Consequences
G7 Summit in The Hague, March 2014
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Researcher at Energy and Security Center, Eugeny Primakov Institute of World Economy and International Relations, RIAC Expert
The sanctions imposed on Russia in connection with the situation in Ukraine and Crimea are not so much a tool for exerting real and painful pressure, as they are a sign of an emerging turnaround in relations between Russia and the West in general, and Russia and the United States in particular.
The sanctions imposed on Russia in connection with the situation in Ukraine and Crimea are not so much a tool for exerting real and painful pressure, as they are a sign of an emerging turnaround in relations between Russia and the West in general, and Russia and the United States in particular.
Sanctions and consequences
On March 17, 2014, US President Barack Obama issued an Executive Order imposing sanctions on top Russian and Ukrainian officials (including US entry bans and asset freezes) [1]. The black list includes twelve people “who wield influence in the Russian government and are responsible for the deteriorating situation in Ukraine”.
On March 20, 2014 US President made an announcement [2] naming another twenty people and one legal entity – Bank Rossiya [3]. Simultaneously, the European Union introduced its own sanction lists, which were expanded from 21 to 33 individuals on March20, and suspended preparations for the Russia-EU summit scheduled for June 2014.
The Russian Foreign Ministry responded that such actions were unacceptable and released a list of individuals, including assistants to the President of the United States, Senators, and Representatives, who are banned from entering the Russian Federation on a reciprocal basis [4].
The sanctions against Bank Rossiya led to international payment systems Visa and MasterCard stopping, without any warning, payments for its customers, as well as for customers of Sobinbank, Investcapitalbank, SMP Bank, and Finservis – banks that turned out to be affiliated to varying degrees with the sanctioned individuals. According to various estimates, this step affected between 400,000 and a million [5] of those banks’ cardholders.
On March 23, 2014 Visa and MasterCard lifted restrictions on processing cards issued by SMP Bank, Investcapitalbank, and Investment Union Bank without explaining why they were cancelling their previous decision, stating only that “these organizations do not meet the criteria on which sanctions are imposed”. On the basis of this new information, Visa International Service Association reinstated access to its network for those banks but left Rossiya and Sobinbank out of the system.
American and Russian flags inside the Mission
Control Center in Korolev
Simultaneously, the international rating agencies S&P and Fitch Ratings, citing the potential impact of Western sanctions on Russia’s economy and business environment, downgraded the outlook for Russia’s long-term foreign-currency ВВВ and local-currency ВВВ+ ratings to negative from stable [6]. Without a doubt, this has reinforced investors’ cautious perception of Russia’s economy, where the stock market had been feeling the effects of the events in Ukraine since the beginning of March [7].
Finally, the G7 Hague Declaration adopted on March 25, 2014 on the margins of the Nuclear Security Summit in The Hague became the crowning achievement of the West’s sanction efforts. The Declaration summarised the earlier disparate statements by the G7 member states about suspending preparations for the G8 summit, which was to be held in Sochi under Russia’s presidency, de facto expelling Russia from the group (in the absence of an established acceptance or expulsion procedure). Second, the document expressed readiness “to intensify actions, including coordinated sectoral sanctions, that will have an increasingly significant impact on the Russian economy” [8].
In early April, formal American sanctions were extended to space cooperation. NASA Associate Administrator Michael O’Brien wrote in a memo that the US government had determined that all NASA contacts with Russian government representatives were suspended, including NASA travel to Russia and visits by Russian government representatives to NASA facilities, bilateral meetings, email, teleconferences or videoconferences [9]. He noted that the only exception was operational International Space Station activities.
Sanctions and Russia
The sanction pressure applied to Russia to date is mostly symbolic in nature, at least for now, rather than a source of actual pain. Some visa bans and asset freezes have caused perplexity and ironic comments from the individuals affected. For instance, according to the Russian President’s spokesman D. Peskov, Presidential Chief of Staff S. Ivanov, who has a more than 20 year track record with the Soviet KGB (including the time spent abroad as a foreign intelligence officer), has faced entry bans from different countries before [10], while Deputy Prime Minister for the military-industrial complex D. Rogozin has hinted that the entry restrictions only applied to private trips and not to official visits [11].
The events of the past few weeks are important because, taken together, they mark the beginning of a turnaround in Russia-West relations towards at least a cooling, if not outright deterioration, for an extended period of time moreover.
Other sanctioned individuals who do not hold any government posts have been able to minimize the sanctions’ potential damage to their assets. For example, G. Timchenko had sold his approximately 44% stake in Gunvor [12], a company with assets in the US, before his name turned up on the sanctions list [13].
The “stunt” perpetrated by Visa and MasterCard to restrict bank card operations of the above-mentioned Russian banks has revived the dormant idea of creating a national payment system modelled after Japan’s JCB, Belarus’s Belcard, or China’s UnionPay. If implementation of a national payment system (based on Sberbank’s existing PRO100 or any other platform) receives a political impetus to go ahead in Russia, Visa and MasterCard might be at risk of losing substantial Russian market shares: these two companies accounted for 85–90% of all card transactions in Russia between 1 January and 1 October, 2013, generating revenues of around RUB 80–90 billion in the first nine months of 2013 [14].
The downgrades of Russia’s credit rating outlook might affect the country’s economy going forward. The most obvious effects might include international capital outflows to other markets, rising costs of borrowing from international capital markets, limited access to outside financing, etc [15]. On the other hand, according to the Vzglyad publication [16], tumbling Russian equities and stock market indexes have brought foreign bargain hunters back to Russia in droves. This means that, despite Western officials’ efforts to spook Russia with sanctions, the Western business community does not quite believe they will be effective [17].
The Cape Ray has been docked at a US naval
base in Spain for two months
Putting NASA cooperation on hold appears to be a purely symbolic step too. For example, Deputy Prime Minister Dmitry Rogozin stated that Russia had no areas of cooperation with NASA other the joint operation of the ISS [18], so they could not be stopped. Russia has an actual monopoly on delivering astronauts and cargo to the ISS. US Shuttle spacecraft were flying to the station prior to July 2011 but the programme has since been put on hold, with manned flights from US territory scheduled to resume only by 2017, from a new technological platform. Russian spacecraft deliver most of the cargo into orbit and, in 2013, NASA had already paid Russia $424 million for taking six of its astronauts into space in 2016 [19].
So what is the West trying to achieve by slapping symbolic and, at first sight, irrelevant sanctions on Russia, especially now that the US and the EU no longer harbour any illusions about Crimea having become part of Russia for good?
Sanctions and Syrian chemical weapons
The following episode in the West’s pressure campaign against Russia provides a useful insight into the rationale behind the sanctions. Take cooperation on dismantling and recycling Syria’s chemical weapons. Bear in mind that the US suspended plans for a military strike against Syria in 2013 after Russia offered assistance in eliminating the chemical weapons there, which the US had accused the Syrian government of using. Around a third of the chemical stockpiles have been evacuated from Syria. At the end of 2014, the Syrian authorities informed the Organization for the Prohibition of Chemical Weapons (OPCW) about a new plan to evacuate all chemicals by April 27, 2014. Under a UN Security Council resolution and the OPCW Executive Council’s decisions, the Syrian chemical weapons have to be totally destroyed by the end of June 2014 [20]. As part of this cooperation, a joint operation was announced on February 14, 2014 for the USS Cape Ray, which recycles the Syrian chemical weapons, to be escorted by the Russian and US Navies in the Mediterranean [21].
Since his second and last term in office ends in January 2017, we can assume that the cooling down policy would continue for at least the next three years.
The operation, envisaged as part of cooperation with the US within the NATO framework, was symbolic in the first place (since US naval ships had been planning to do the escorting on their own) and was supposed to show that, despite differences over Ukraine and European missile defences, Russia and NATO could still work together effectively on upholding international security and non-proliferation of WMDs [22].
Less than a month later, on 5 March 2014, in remarks at a press conference held following the NATO-Russia Council meeting, NATO Secretary General Anders Fogh Rasmussen said that, as “Russia continues to violate Ukraine’s sovereignty and territorial integrity”, NATO had suspended the entire scope of cooperation with Russia, including the maritime escort for the US ship Cape Ray. He stressed this would not affect the destruction of the chemical weapons but that Russia would not be involved in escorting the US vessel [23].
Answering a question from CNN at the same press conference about the next steps in sanctions against Russia, Anders Fogh Rasmussen said he hoped that “steps like the one we have taken today, as well as steps taken by other actors, will facilitate diplomatic and political solutions”. He added that “some pressure on our Russian partners will pave the way … for a long-term, sustainable political solution to this crisis in Crimea” [24].
In this regard, it should be admitted that the idea of creating a single front of sanctions could be the only explanation for the decisions currently being taken by our Western partners. We should treat the sanction steps taken by different actors against Russia from a systemic point of view. The events of the past few weeks are important not only because of their explicit and potential implications taken individually, but also because, taken together, they mark the beginning of a turnaround in Russia-West relations towards at least a cooling, if not outright deterioration, for an extended period of time moreover.
US President Barack Obama is under significant pressure at home for being indecisive towards Russia [25]. The only way to overcome this pressure is to increase the scope of the sanctions across different areas of cooperation and through different actors. Since his second and last term in office ends in January 2017, we can assume that the cooling down policy would continue for at least the next three years.
Sanctions and the Iranian nuclear dossier
The matter of settling the Iranian nuclear problem within the framework of the P5+1 and Iran is no less important for the White House’s domestic policy positions. In November 2013, Tehran and the so-called P5+1 (United States, United Kingdom, France, Germany, China, and Russia) reached an agreement on suspending Iran’s nuclear activities in exchange for partial lifting of the sanctions against the Islamic Republic [26]. The parties began implementing the agreement on January 20, 2014. A comprehensive agreement should be reached by July 20, with international sanctions against Iran to be lifted completely.
The low level of economic cooperation between Russia and the US gives the United States a considerable scope for politicizing bilateral relations with no regard for the business community (something that would have been impossible, for example, if relations between the US and China were to deteriorate).
The latest round of talks between the P5+1 and Iran took place in Vienna on 17 March 2014, the day the first round of sanctions was announced against officials of Russia, Ukraine and (at the time the Autonomous Republic of) Crimea. Russian Deputy Foreign Minister S. Ryabkov told ITAR-TASS that, if the US continued to escalate the confrontation by imposing sanctions, Russia might be forced to retaliate with a number of asymmetrical measures in the areas of dialogue and cooperation that are of paramount importance to Washington. After stressing that cooperation on Iran’s nuclear programme was a priority and fundamental area for Russia in its capacity as a depository of the Treaty on the Non-Proliferation of Nuclear Weapons, guarantor of international regimes of non-proliferation of WMDs, and a participant in the key forums in those areas, the Deputy Minister noted that the historic importance of Crimea’s reunification with Russia was incomparable to the Iran efforts and, in the exceptional case of escalating pressure on Russia and “upping the ante”, retaliation might come precisely in the area of the Iran talks [27].
Such a development would backfire, causing Barack Obama’s administration, also criticized at home for being excessively soft on Iran, at least some inconvenience [28]. White House Press Secretary Jay Carney indirectly confirmed the importance of cooperation with Russia on Syria and Iran at a daily briefing on 11 March 2014, saying that “we obviously have a very important cooperation with Russia on the destruction of Syria’s chemical weapons”, where “Russia has played a leading role”. “We have an important cooperation with Russia on other matters, including issues that are subject to negotiation with the P5+1 and Iran’s nuclear programme. And we intend to continue working with all our partners on those issues”, he said [29].
Sanctions and the United States
The low level of economic cooperation between Russia and the US gives the United States a considerable scope for politicizing bilateral relations with no regard for the business community (something that would have been impossible, for example, if relations between the US and China were to deteriorate). Yet it would be ill-advised to politicize and leverage for pressuring Russia on those areas of cooperation in both countries’ bilateral and international obligations where interaction can be viewed as successful: nuclear security, non-proliferation of WMDs and disarmament.
On the other hand, the vague language of Barack Obama’s statements and The Hague G7 Declaration about “coordinated sectoral sanctions” is something to worry about. Perhaps that is precisely what Russia should fear. In theory, the US could try and bring oil prices down by cutting cartel deals with Arab countries or even Iran (an idea has been floated of lifting some of the sanctions against Iran in exchange for it flooding the market with oil) [30] but this is also an unlikely scenario. Saudi Arabia needs sustainably high oil prices: in February 2011, in a bid to stave off protests driven by the Arab Spring, Saudi King Abdulla announced a $97 billion public aid package until the end of 2014, so keeping oil prices high to pay for those obligations will be a key priority for this key player on the Middle East oil market [31].
Conceivably, the US could replace Russian natural gas supplies to Europe with its own shale gas, which is costlier to produce but easier to transport; yet the gas market is much less volatile than its oil counterpart, while Europe could find that it did not pay strategically to sanction hydrocarbon supplies from Russia, until substitution deliveries could at least be guaranteed.
***
In any case, Russia-US relations have been damaged at least until the end of the current administration’s term. Speculation is afoot that, if the Republicans come to power for the next presidential term, their policy towards Russia would be even tougher. Surprisingly, if history is any indication, the opposite might be true. For example, all key breakthroughs in USSR-US cooperation, at least in the areas of non-proliferation, strategic stability, and disarmament, were achieved while the Republicans were in power. The Treaty on the Non-Proliferation of Nuclear Weapons (ratified in November 1969), the Strategic Arms Limitation Treaty (SALT I) and the Anti-Ballistic Missile Treaty (ABMT) were all signed with the Richard Nixon administration; the Intermediate-Range Nuclear Forces Treaty (INF) with the Ronald Reagan administration; the Strategic Arms Reduction Treaties (START I and START II) with the George Bush Sr administration, and the Treaty on Strategic Offensive Reductions (SORT) with the George Bush Jr administration. A phrase coined by E.Ya. Satanovsky best explains the idiosyncrasy of communicating with representatives of the two parties that alternate in power in the US: “The Democrats will suffocate you in a welcoming embrace and crush your ribs, while the Republicans will honestly punch you in the face”. In this regard, the priorities and policies of the Republican Party are much more predictable and consistent.
Preparations must be made for a further escalation in use of sanctions against the Russian Federation and proactive work performed on weak spots, without waiting for the West to try to test the resilience of the Russian economy by empirical means.
1. Fact Sheet: Ukraine-Related Sanctions. Press Secretary of the White House Office. 17 March 2014. http://m.whitehouse.gov/the-press-office/2014/03/17/fact-sheet-ukraine-related-sanctions
2. Treasury Sanctions on Russian Officials, Members of the Russian Leadership’s Inner Circle, and an Entity for Involvement in the Situation in Ukraine. Press release by US Department of the Treasury. 20 March 2014. http://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx
Fred Lucas. Obama Announces New Sanctions on Russia: ‘These Are All Choices the Russian Government Made’. The Blaze. 20 March 2014. http://www.theblaze.com/stories/2014/03/20/obama-announces-new-sanctions-on-russia-these-are-all-choices-the-russian-government-made/ Ukraine-related Designations. Office of Foreign Assets Control. US Department of the Treasury. 20 March 2014. http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20140320_33.aspx3. OAO Joint-Stock Bank Rossiya services a considerable portion of Gazprom’s business, primarily that of the Gazprom Mezhregiongaz Group and Gazprom Energoholding. According to the US Treasury, the bank was designated because it is controlled by Yu. V. Kovalchuk, also sanctioned as an individual.
4. List of officials and members of the US Congress banned from entering the Russian Federation on a reciprocal basis owing to US sanctions against Ukraine and Crimea. Official website of the Russian Foreign Ministry. 20 March 2014. http://www.mid.ru/brp_4.nsf/newsline/177739554DA10C8B44257CA100551FFE
5. S. Smirnov, M. Overchenko, E. Kravchenko. United States imposes sanctions on Bank Rossiya. Vedomosti. 20 March 2014. http://www.vedomosti.ru/finance/news/24261331/obama-ssha-uzhestochat-sankcii-v-otnoshenii-rossii
Visa and MasterCard sanctions. What are affected clients to do? Moskovsky Komsomolets. 22 March 2014. http://www.mk.ru/economics/article/2014/03/21/1002118-sanktsii-visa-i-mastercard-chto-delat-postradavshim-klientam.html6. S&P Downgrades Russia’s Rating. Vzglyad. 20 March 2014. http://www.vz.ru/news/2014/3/20/678227.html
International Experts Cut Ratings of Gazprom and 15 Russian Banks. Glavred. 25 March 2014. http://glavred.info/ekonomika/mezhdunarodnye-eksperty-snizili-reyting-gazproma-i-15-rossiyskih-bankov-275099.html7. Russian Market Tumbles 12% by Close of Trading. Vedomosti. 3 March 2014. http://www.vedomosti.ru/finance/news/23480971/rossijskij-rynok-akcij-ruhnul-na-5-7
8. Déclaration de La Haye G7. Elysee. 25 March 2014. http://www.elysee.fr/declarations/article/declaration-de-la-haye-g/
9. NASA Suspends Cooperation with Russia. RBC. 3 April 2014. http://top.rbc.ru/politics/03/04/2014/915307.shtml
10. Obama Introduces Sanctions against Bank Rossiya and Major Russian Businessmen. Interfax. 20 March 2014. http://www.interfax.ru/world/366136
11. Rogozin Expects a Package from NATO Containing “Teeth Ground in Powerless Anger”. RBC. 3 April 2014. http://top.rbc.ru/politics/03/04/2014/915422.shtml
12. One of the world’s biggest oil traders.
13. Timchenko Sells Gunvor on the Eve of American Sanctions. Vedomosti. 20 March 2014. http://www.vedomosti.ru/companies/news/24282411/gunvor-timchenko-bolshe-ne-nash-akcioner
14. Russia Ready to Scrap Visa and MasterCard. Izvestia. 21 March 2014. http://izvestia.ru/news/567890#ixzz2x4CdPoMO
15. For more information: Five Negative Consequences of Russia’s Rating Downgrade. Vesti Ekonomika. 12 March 2014. http://www.vestifinance.ru/articles/40880
16. S&P Cuts Russia’s Rating. Vzglyad. 20 March 2014. http://www.vz.ru/news/2014/3/20/678227.html
17. They Buy Russian. Vzglyad. 19 March 2014. http://vz.ru/economy/2014/3/19/677967.html
18. NASA Suspends Cooperation with Russia. RBC. 3 April 2014. http://top.rbc.ru/politics/03/04/2014/915307.shtml
19. Ibid.
20. Alexei Bogdanovsky. United States to Continue Cooperation with Russia on Syria and Iran. RIA Novosti. 11 March 2014. http://ria.ru/world/20140311/999060746.html
21. The scheduled joint operation with the US Navy should not be confused with the current phase of evacuation of Syrian chemical weapons in which Russia is already actively involved. The heavy nuclear-powered missile cruiser Pyotr Velikiy, together with naval ships from Denmark, Norway, and China, is participating in escorting the Arc Futura and the Taiko, which collect hazardous chemicals from the Syrian port of Latakia for shipping to Italy, from where the Cape Ray will pick them up for processing in neutral waters under the guard of the US Navy. For more information: The Heavy Nuclear-Powered Missile Cruiser Pyotr Velikiy Secures Evacuation of Yet Another Batch of Syrian Chemical Weapons. Ministry of Defense of Russia. 4 March 2014. http://function.mil.ru/news_page/country/more.htm?id=11906539@egNews
22. Gabriela Baczynska, Adrian Croft. Exclusive: Russia, NATO Plan Joint Operation On Syria’s Chemical Weapons. Reuters. February 14 2014. http://www.reuters.com/article/2014/02/14/us-syria-crisis-russia-nato-idUSBREA1D0Y120140214
23. Remarks by NATO Secretary General Anders Fogh Rasmussen at the Press Conference Held Following the Meeting of the NATO-Russia Council at NATO HQ, Brussels. NATO official website. 5 March 2014. http://www.nato.int/cps/en/natolive/opinions_107743.htm
24. Ibid.
25. Private exchanges with US experts on the margins of the Nuclear Knowledge Summit in Amsterdam (20-22 March 2014)
26. The Geneva agreements have been reflected in the Joint Action Plan for settling the Iranian nuclear programme of 24 November 2013.
27. Deputy Foreign Minister Sergey Ryabkov: “Russia Against “Upping the Ante” in Iran Talks”. ITAR-TASS. 20 March 2014. http://www.interfax.ru/366039
28. Russia Will Respond in Kind to US Sanctions - Deputy Foreign Minister. Reuters. 19 March 2014. http://www.trust.org/item/20140319202535-fpsm4
29. Excerpt from a daily briefing by the White House Press Secretary Jay Carney (a question about cooperation with Russia on Syria). 11 March 2014. http://www.officialwire.com/pr/daily-briefing-by-the-press-secretary-jay-carney-031114/
30. Tehran Announces Embargo on Oil and Gas Supplies to All 27 EU Countries. 17 March 2014. http://ruposters.ru/archives/3540
31. Paul Stevens, Matthew Hulbert. Oil Prices: Energy Investment, Political Stability in the Exporting Countries and OPEC’s Dilemma. October 2012. P.9. http://www.chathamhouse.org/sites/default/files/public/Research/Energy,%20Environment%20and%20Development/1012pp_opec.pdf (last visited on 2 April 2014).
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