Article by: Dirk Mattheisen
To hear Marine Le Pen talk, sanctions against Russia don’t work, and she stands a decent chance of being elected president of France. She has company here and there in odd places. The deputy speaker of the Serbian parliament, Gordana Chomich, recently said she could not support sanctions because they hurt the Russian people, and did sanctions actually target oligarchics anyway?ma
So, do sanctions work and who do they harm?
Moscow does not dictate to Kyiv what its domestic and international policies should be. Socially, the chances of a pro-Russian government in Kyiv are slim to none. Russia is mired in a costly military campaign in eastern Ukraine from which it cannot withdraw nor can it scale up without fear of new sanctions. Russia has failed to take Mariupol or create a land bridge to Crimea that is vital to making Crimea economically viable.
Moreover, Russia’s hold on Crimea is recognized by no one, while Crimea endures an economic collapse that Russia can’t remedy, compounded by crude Russian social oppression that is routinely condemned by others. And dreams of Novorossiya across southern Ukraine are dead. Russia will be constrained by sanctions for as long as it does not withdraw from Ukraine.
Economic losses: from 1.5% to 6% of GDP
”…sanctions and counter sanctions might have initially reduced real GDP by 1 to 1½ percent. Prolonged sanctions may compound already declining productivity growth. The cumulative output loss could amount to 9 percent of GDP over the medium term.”
Since the Russian economy is expected to grow at about 1.5% in the future, that is equivalent to 6 years of no growth.
Estimates that Russia lost over $100 bn in 2014/2015 due to sanctions suggest the cost is higher. A loss of $100 bn for a Russian economy that went from a GDP of about $2,100 bn in 2014 to about $1,300 bn in 2015–in large part due to the fall in energy prices–suggests a cost from sanctions in those two years of anywhere from 2 to 6% of GDP in rapidly evolving economic circumstances.
Moreover, anecdotal evidence suggests that after three years of low oil prices and sanctions, Russian finances are now in a desperate state and, therefore, sanctions have contributed to a substantial decline in Russia’s economic welfare.
For example, the murky Rosneft privatization suggests Russia is moving funds between the government, central bank, and public enterprises to make it look like government finances are better than they really are. Rosneft is a sanctioned firm and has had trouble securing financing to sustain its operations, at one time seeking a bailout from the Russian government. It also suggests that massive corruption continues.
Rejection of Russia’s behaviour
Beyond the failure to achieve its goals and the economic cost, there are other equally important impacts from sanctions. Sanctions demonstrate a rejection by the international community of Russia’s behavior.
This provides Ukraine an international stage from which to counter Russia’s aggression. Over time, the UN and various EU bodies have fallen in line, as well, in explicitly condemning Russian aggression toward Ukraine, adding to the effect of sanctions.
In addition, the nature of sanctions has been important in targeting their effect. The most important sanctions are the more comprehensive ones that prohibit providing new debt or equity of greater than 30 day’s maturity and restrictions on the energy and defense sectors.
These prohibitions, along with a reluctance to risk capital in Russia while tensions persist, have all but eliminated Russia’s access to international finance.
Foreign investment in Russia has plummeted from $71 bn in 2013 to just $7 bn in 2016. It is not expected to return to anywhere near the 2013 level in the foreseeable future (IMF: Russian Federation – Staff Report For The 2016 Article IV Consultation). In the absence of sanctions, what is the likelihood that companies such as ExxonMobil would have halted their investment plans in Russia? They might have assessed the risk as higher, but the prohibitions and arm-twisting provided by sanctions are what stopped them.
The other sanctions that were designed to target key businesses and individuals in Russia are important, as well, in recognition of the role they play in supporting Putin. By targeting wealthy or influential businesses and individuals closely associated with Putin, the West hoped to hurt those who were key in enabling Putin’s actions against Ukraine. As beneficiaries of vast riches extracted from the Russian economy, their interests are in self-enrichment at the expense of the state and the people.
Sanctions take time
In one key respect sanctions have been exceptional. Against expectations, they have held. The West has new found resolve to confront Russian interference in the affairs of not only Ukraine but of all Western countries through its manipulation of information and various forms and levels of aggression.
No one, including Marine Le Pen, should be surprised that sanctions take time. Russia is still a large, powerful country capable of defending itself economically and politically. Sanctions are not war. They don’t produce dramatic, immediate results. Even wars don’t yield immediate results; otherwise, Russia would have gotten what it wanted long ago. Sanctions take time, but they are ultimately effective; as sanctions against Iran, Myanmar and South Africa have shown.
When sanctions are not effective, such as in the case of North Korea, it is the sanctioned state that suffers. North Korea has been reduced to an isolated, impoverished pariah state. Like North Korea, Russia now faces years of economic stagnation–and probably slow national decline–unless it can find a way to reform its economy and a path to rapprochement with the international community.
Marine Le Pen can rest assured that sanctions are effective. A new report by the US Department of State concludes that sanctions against Russia have caused substantial harm to targeted individuals and firms. As reported by BuzzFeedNews the State Department report concludes that
“the average sanctioned company or associated company loses about one-third of its operating revenue, over one-half of its asset value, and about one-third of its employees relative to their non-sanctioned peers.” BuzzFeedNews goes on to report,
“…the researchers also discovered that the “smart” or “targeted” sanctions placed against Russian companies and individuals starting in 2014 live up to their name. The four rounds of sanctions that have been put into place — aimed at Putin’s inner circle, several Russian banks, the defense industry, and the energy sector — have, according to the paper, managed to affect those individuals without being a primary damager of the Russian economy broadly.”
BuzzFeedNews quotes Bill Browder, co-founder of Hermitage Capital Management Group and zealous critic of Putin, that Putin is “apoplectic” about the sanctions and as told by Browder,
“In my mind, the reason for that reaction is that wealth is so concentrated in Russia that you can go after the assets of just a few bad players and you have a disproportionate effect on the evil and rot in Russia.”
Harm to ordinary Russians?
Since 2013 nearly all Russians have experienced a decline in their economic welfare, and poverty has increased dramatically—it rose from 11.2%, or 16.1 mn people in 2014, to an estimated 14.2%, or 20.1 mn people in 2016. Deputy speaker Gorsana Chomich should know though that the principal reason is not sanctions but poor economic management and the collapse in energy prices, as well as self-inflicted economic harm from political adventurism.
In the realm of sanctions, the greatest harm to ordinary Russians has come from Russia’s own counter-sanctions, especially on the import of food, which has driven up prices beyond what many Russian can afford.
Lest deputy speaker Gorsana Chomich still harbor concerns that sanctions have not been specific enough, as of mid-2016 the US has sanctioned by name 111 businesses and political figures and 82 firms and an additional 136 firms under the sectoral sanctions (an additional 7 individuals, 8 firms, and 2 vessels were added in December 2016). The EU has sanctioned as of mid-2016 149 individuals and 37 firms and an additional 20 firms under sectorial sanctions. Information on US and EU sanctions, including targeted individuals and businesses can be found here (US) and here (EU).
The economic welfare of ordinary Russians will not change materially if Western sanctions end because economic growth will still not be sufficient without internal reform. Economic reform is supposedly conditioned by Russian’s fear of economic chaos, but that is not the choice. Russia can prosper in the same way that all countries prosper through sound economic policies and a strong civil society. Ordinary Russian’s suffering is not an integral part of Russian exceptionalism, as much as Putin would like to convey that impression.
It is a toss up whether the Russian upper, middle or lower class will buckle first, but, when the Soviet Union collapsed, it was the Russian elite that led the rush for the exits. When that happens again, will Putin have the wisdom of Gorbachev to concede the obvious and step aside?
An excellent and balanced overview of sanctions against Russia’s violation of Ukraine’s sovereignty in the context of broader US-Russia relations by Andrew Weiss and Richard Nephew from the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs can be found here.