The West is Unlikely to Slap Meaningful Economic Sanctions on Russia
Escalation of the Crimean conflict and the risk of an invasion by Russian troops further into Ukraine have raised a concern about international mechanisms of deterrence, economic sanctions being among them. Although Brussels and Washington made rather harsh statements at the outset of the crisis, it is quite improbable that they will impose heavy sanctions on Moscow. This means that the international community lacks an adequate response to Russia. The Russian Federation is the third-largest trading partner with the European Union (next to the US and China) with $417.4 billion in trade in 2013. Therefore economic sanctions could have an adverse effect on Europe. Considering the current state of several European economies, the results would be grave.
Russia is one of the world’s biggest oil-producing countries and the world’s second-largest oil exporter. It supplies most of its oil and gas to the European Union. The only way to affect the Russian economy and deter Putin would be to target Russia’s energy sector. The European Union would have to refuse to purchase Russian natural gas, which presently they are not able to do. In 2013, Russia’s earnings from oil and natural gas exports amounted to $229 billion.
Out of 485 billion cubic meters of gas consumed by the European Union annually, Russia supplies about 160 billion cubic meters, which is almost one-third of the total volume. According to the forecasts by governments and energy companies, in the immediate future, consumption may increase to 585 billion cubic meters annually, and imports from Russia — up to 175 billion. Therefore, Russia’s share of the gas supply to the EU will remain about the same.
So neither the US nor the EU will impose an embargo on oil and gas imports from Russia because the consequences would have a negative effect on the global market which is expected to see growth of oil consumption up to 92.5 million barrels daily in 2014.
Russia’s budget for 2014 was calculated based on the average annual oil price of $93 per barrel. In case sanctions become a reality, the prices will well exceed $130 billion and will continue to rise. This will bring Russia at least an additional $37 from each exported barrel of oil. Let us not forget that in 2013 Russia exported about 234 million tons of oil and liquid gas.
Imposing sanctions against key Russian energy companies also seems quite doubtful. Several Russian companies signed field development contracts with a number of American and European oil and gas producing companies. Therefore, the blow to Russian oil and gas producing companies will affect their western partners whose business interests are concentrated in Russia.
According to Bob Dudley, the Group Chief Executive and a director of BP, which is one of the largest foreign investors in Russia’s oil-producing industry — his company has signaled that it will not halt investments in Russia. The President of Total Christophe de Margerie promised to continue investing in the Yamal LNG project. Paolo Scaroni, the Chief Executive of Eni, said that sufficient gas reserves give Russia powerful instruments of influence on Europe. He believes that the worst possible scenario would be complete termination of gas supplies from Russia through Ukraine. According to Rainer Steele, Chairman of the Board of Directors of Gazprom’s partner, Wintershall, sanctions against Russia will not settle the issue and will be ineffective. Philipp Mißfelder, member of the German Parliament, also said that sanctions against Russia will affect Germany and that sanctions are never a good method for export-oriented Germany.
Direct EU investments in Russia’s economy are yet another issue. Foreign direct investments from the Netherlands in Russia amount to 12% of the overall investment outflows from Amsterdam, 4.3% from Germany, 3.4% from France, 30% from Cyprus (mostly reinvestments), 3.8% from Ireland. Investment outflows from Russia to the EU are also quite considerable: 37% — Cyprus, 15.9% — the Netherlands, 2.5% — Great Britain, 2.2% — Germany. This shows that blocking bilateral financial flows between Russia and the EU is not reasonable from the economic point of view.
According to disclosed documents of the British Parliament, Downing Street also recommends refraining from closing British markets from Russian investments, and not to go beyond visa restrictions and exclusion for certain Russian officials. In particular, one of the documents states that Britain should not impose any trade sanctions or close London’s financial centre for Russian capital. These recommendations also include negating the issue of participation of the North Atlantic Alliance in settling the Crimean conflict. This means that the EU will resort only to some political instruments available to the OSCE and the UN that will be targeted at certain persons and not the whole country.
All in all, Britain and Germany will attempt to not affect their own economies, and this is what will determine London’s behaviour. I believe that Britain and Germany will only act as diplomats in the Crimean conflict. They might try to lobby for some nominal sanctions which were hinted at by US Senator John McCain who expressed his disappointment with London’s official stand and that Europe is ignoring history’s lessons. Essentially he said that the US wants to impose certain effective sanctions, but Europe is not ready for such serious measures.
Russia only ranks 20th among the countries consuming US products and is not among the top ten countries who export goods and services to the United States. Therefore, Washington has only financial leverages at its disposal. Moreover, sanctions similar to those imposed on Iran, for example, will affect and most probably block economic cooperation between Russia and the EU which is unacceptable to Brussels. This means that the US hasn’t any flexible economic leverages against Moscow.
Washington now counts on imposing sanctions by its European partners aimed at limiting access to the Russian President’s inner circle and partners to their bank accounts and financial flows within Europe. Therefore, they expect some upward pressure, sparking discontent among the political elite, which would make it possible to exert influence on the Kremlin. However, it is probable that such measures will turn out to be ineffective.
It is fair to say that the international system of checks and balances is no longer efficient, and the depth of integration of the global economy no longer allows control over countries with nuclear weapons and a substantial share of global export. Therefore, despite all the efforts of the world community, there are no longer ‘innocent’ leverages to exert effective pressure on such players as Moscow, Washington, and Beijing. Any instruments which may help achieve the desired results are going to bring serious consequences to the global economy and the initiators of the sanctions. The world is gradually approaching the start of a new Cold War, which today, as strange as it may sound, may have a stimulating effect on key global economies.
Therefore, the West is likely to resort to financial aid for Ukraine instead of further complicating relations with Russia and thus prevent the risk of economic loss in the context of the current crisis. Neither Washington nor Brussels will dare impose serious economic sanctions against Russia. Hence, these instruments are unlikely to influence the Kremlin’s policy towards Ukraine in the medium term.