Will the new wave of American sanctions against Russia be effective?

Putin Obama US-EU sanctions. Political cartoon "Aim at the Wallet!"

 

2015/08/10 - 11:44 • Politics

Article by: Yuriy Gorodnichenko (University of Berkeley) and Oleksandr Talavera (University of Sheffield), co-founders of VoxUkraine, for European Pravda

On July 30, 2015, the United States government announced a new wave of sanctions against Russia.  The announcement noted that the aim of the sanctions is “… to maintain pressure on Russia for violating international law and fueling the conflict in eastern Ukraine.”

Among those who fall under these sanctions are former Ukrainian officials and operators of Crimean ports, as well as Russian companies, including those that were used as part of schemes to evade earlier sanctions.  In this article, we will consider each of these groups and evaluate the potential effectiveness of this latest round of sanctions.

First of all, however, we will set a bar for expectations: although existing sanctions were not immediately effective, they will likely work in the long term (VoxUkraine has previously analyzed the impacts of sanctions on the Russian economy and stock market).

Falling oil prices have had a deeper impact on the Russian economy.  Still, sanctions are certainly building on the impact of petroleum losses.  However, large reserves of foreign currency allow the Russian government to reduce the impact of economic contraction for some time.

Group 1.  Putin’s closest entourage and Kalashnikov Concern

The BBC identified Gennady Timchenko and Boris Rotenberg among Putin’s closest associates when it explained why these individuals were targeted by the July 2014 sanctions.

This time, sanctions were brought in against individuals and companies that helped Timchenko and Rotenberg avoid the earlier sanctions.  The same applies to Kalashnikov Concern [of the AK assault rifle fame], which was included in the sectoral (firearm manufacturing) sanctions list.

Apparently, Timchenko and Rotenberg were inconvenienced this year, and set out to devise ways to minimize the negative impact of the restrictions imposed on them.

The new wave of sanctions is focused on closing some of the loopholes for Putin’s friends.

This may send a message to other businessmen linked to the Russian president: ploys will not fool the US government, and the price of Putin’s friendship will be high.

Because many financial operations are normally conducted in US dollars, exposing additional organizations that collaborate with Timchenko and Rotenberg may prove to be very damaging to them.

However, Kalashnikov Concern will likely not feel a significant impact from sanctions in the short term, because it has financial support from the Russian government.  In other words, the sanctions will be felt by Russian taxpayers rather than the owners of Kalashnikov.

Group 2.  Former Ukrainian officials

The new list includes Andriy Klyuyev, Serhiy Kurchenko, Eduard Stavytsky, and Oleksandr Yanukovych.

All played an important role during the Yanukovych presidency.  According to unofficial reports, they escaped to Russia in 2014, making off with billions of dollars.

These odious Yanukovych supporters had sufficient time to take their riches from Ukraine, and currently continue to live in comfort in Russia.  Perhaps these sanctions were brought in too late.

In addition, these individuals were able to minimize legal actions against them for a time, because the new Ukrainian leadership could not provide persuasive proof of their crimes.  As a result, other nations were not required to freeze their assets.

The new round of sanctions will make life difficult for Yanukovych’s allies, even without criminal convictions in Ukraine.

Group 3.  Crimean ports

The new round of sanctions targets the major Crimean ports, including Kerch, Feodosia, Sevastopol, Yalta and Yevpatoria.  In addition, the Kerch ferry [connecting Crimea to Russia] has also fallen under sanctions.

It is believed that Russia has succeeded in establishing good maritime connections between Crimea and the Russian mainland.  The top charts in the figure below indicate that traffic between Russia and Crimea has been increasing.  Russian media has even reported that ferry companies based in Greece have begun to operate operate new routes, such as Sevastopol-Novorossiysk.

The improvement of communications between the mainland and the peninsula is very important to Russia as ferry transit to Kerch is unpredictable and dependent on the weather.  The lower graphs in the figure below indicate that wait times are strongly influenced by weather and peak demand.

The inclusion of transit companies in the sanctions list will complicate travel and shipping between Crimea and Russia.  New US sanctions can be a warning to transport companies which operate routes to and from Crimean ports.

In general, this block of sanctions increases the cost of doing business in Crimea.  As a result, Russian taxpayers will pay a higher price for the Crimean occupation.

In addition, the expensive and unreliable ferry link will lower public support for the occupation, as the standard of living will continue to fall.  For example, the increase in transport spending can lead to rising prices in Crimea.

As predicted by VoxUkraine, Crimea is gradually becoming a backward, depressed region like Transnistria, Abkhazia and South Ossetia.

Crimea-Russia traffic statistics. Source: mtdir.ru/novosti/operativnaya-obstanovka

Group 4.  Rosneft subsidiaries

As noted above, falling oil prices are the most effective “sanctions”.  However, previous restrictive measures have increased the cost of credit and oil extraction.

This is similar to the situation with Kalashnikov Concern in that Rosneft is likely to be supported by the Russian government.  As a result, the immediate impact on Rosneft may be negligible.  Rosneft stock prices did not fall following the announcement of sanctions – see graph below.

Rosneft share prices on the Moscow Stock Exchange, July 27-31, 2015. Source: yahoo.finance.com

However, maintaining sanctions will deplete the Russian treasury in the long term.

Without large oil revenues, the Russian government will be forced to choose between reducing support for companies like Rosneft and cutting back other government programs such as health care and education.  Any of these options may prove to be very costly for the Russian authorities.

The US government is counting on Russian leaders, like the government of Iran, to ultimately choose to conduct serious negotiations and to comply with international laws.

Group 5.  Subsidiaries of Russian state banks

New sanctions will put even more stringent conditions on Russian banks and their subsidiaries, not only within Russia, but in other countries as well.  For example, Prominvestbank, which is essentially a Ukrainian subsidiary of the Russian Vnesheconombank, will now be sanctioned.

It is worth noting that the banking sector is a vulnerable part of the Russian economy.  In addition to the recession, which weakens bank balance sheets, from now on Russian banks will be restricted in their ability to borrow on international capital markets.  In addition, their international operations are increasingly restricted.  The shortage of financing sources hinders Russian loans, and this in turn deepens the economic downturn.

In spite of these obstacles, Vnesheconombank and other institutions of its scale will not collapse in the immediate future.  They are too big for Russia to allow them to fail.  Once again, the cost of supporting the banking sector will fall on the shoulders of Russian taxpayer.

The safety cushion of Russia’s foreign exchange reserves appears significant today, but sooner or later these costs will probably become too expensive for the Russian government.  Russian society will become increasingly dissatisfied with the sacrifices which it is forced to make because of the actions of its government toward Crimea and Donbas.

Summing up, it is worth noting that sanctions against Crimean ports and shipping companies are expected to have a greater immediate impact than other restrictive measures.  However, we should not underestimate the influence of other sanctions, as they will send a strong signal and will exhaust Putin’s regime.

Translated by: Adriana Mugnatto-Hamu
Edited by: Kirill Mikhailov
Source: European Pravda

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  • Dagwood Bumstead

    I doubt whether the sanctions will influence the dwarf at all. He is obsessed with recreating the USSR, destroying the Ukraine as a free sovereign state, and if it means crippling the Dwarfstan economy then so be it. The latest measures have merely ratchted the sanctions up a notch, when at least 10 notches would be needed to have any immediate serious impact. As the Germans would say, “Klotzen, nicht kleckern” or “thump, don’t tap”.
    The only bright spot on the horizon is that Obama will be gone in 17 months and that his successor, whoever he/she may be, will be a lot tougher with Moscow.

  • Jimma

    Whatever the Midget has up his sleeve, he better do it before H Clinton or a Republican takes office. Neither care too much for Putin and will make life miserable. Hilary has stated she will,arm Ukraine thanks to George Soros. What I can’t believe is Soros inability to persuade Obama to arm Ukraine. If Ukrainians want independence from Russia, they will have arm and take the war to Putin inside Ukraine and Crimea. The strongest force Americans had in its Revoluntionary War for independence from England was its Militia. Ukrainians have a choice to make. There is no heart stronger than a volunteer if they love their country and are ready to lay down their life for Freedom.