Rest assured, Marine Le Pen, sanctions against Russia work

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2017/02/10 • Economy, Featured

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?

The best evidence for the success of sanctions is that Russia has not achieved its goals.

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

In terms of Russia as a whole, if Alexii Kudrin is to be believed, sanctions cost Russia 1.5% of GDP, which aligns with the IMF, which estimates that

”…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.

Russia's losses from sanctions. Graphic: Ukrainian Crisis Media Center

Russia’s losses from sanctions. Graphic: Ukrainian Crisis Media Center

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.

The US and the EU have acted on behalf of the principle of self-determination and the inviolability of national borders, and they continue to do so. 

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.

Targeted effect

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.

Putin is clearly worried about public discontent as the 2018 election approaches and, if Putin’s support begins to look shaky, he has to worry about the loyalty of the oligarchs and others who are already hurting from sanctions.

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).

Sanctions are the consequence of Russia’s own policies and the limited means available to the West to influence Russia’s aggression against other states. 

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.

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  • Dagwood Bumstead

    Marine le Pen is “la putain de Putin”. Her party receives millions from the dwarf and she couldn’t run an election campaign without this financial support. She won’t bite the hand that feeds her- on the contrary, she’ll obey her Kremlin master.

    • Brent
      • Dagwood Bumstead

        Great cartoon and oh so true! Not sure I understand why the dwarf is going after Marine Le Pen, though. First, I thought he said that Dwarfstanian prostitutes are the best in the world???? Second, we KNOW he likes little boys, so what’s he doing with Marine- she’s an adult girl!? And third, does Alina know????

    • veth

      This time Putlers money will be wasted, she will not win.

  • Mephisto

    if the idiot dwarf actually bought Crimea from Ukraine, it would be hundred times cheaper.

    • Dagwood Bumstead

      But Kyiv won’t sell the Crimea at ANY price!

      • Murf

        Putin could have offered every man,women and child in Ukraine a billion dollars each and still come out ahead.

  • zorbatheturk

    Sanctions must be kept until Putin is crushed like a louse.

    • veth

      x
      EU and US to maintain sanctions against Russia until full implementation of Minsk agreement
      High EU representative on foreign police stated this in an interview to The Wall Street Journal

      09:03, 11 February 2017
      603

      Reuters
      The administration of US President Donald Trump and European officials agree on the need to maintain sanctions against Russian Federation until Minsk agreement is fully implemented.

      This was announced by Federica Mogherini, the High Representative of the European Union for Foreign Affairs and Security Policy, in an interview to The Wall Street Journal.

      According to the results of the meeting with Rex Tillerson, the US Secretary of State, and other high-level officials of the US Administration, Mogherini declared: “We have agreed that Minsk agreement is to be implemented on a full scale and sanctions are connected with the full realization of this agreement.”

      • туфтуф

        The sanctions should stay in place even if the Minsk is fully implemented. Russia will not voluntarily give away part of its territory, Crimea, and it would be better that the sanctions be introduced on its energy sector for 2 reasons: EU would be more US oriented by buying more expensive energy from there, and Russia should look more to China as the land of the future.

        • Murf

          Yep Russia needs to follow Dugin’s Eurasian philosophy and becomes China’s puppet state.
          Best thing for everybody.

          • туфтуф

            I agree wholeheartedky. P wants to make Drumpf an offer he cnt refuse: take over the entire Chinese tech industry and sell it to India. Thus enabling US to become an industrionalized country again.

          • Murf

            What does he need Putin for to do that?
            All Trump has to do is raise tariffs on Chinese imports to the point were the factories will relocate to another country.
            With labor cost so low( 1/2 the cost of China) and the FTA with Canada, Ukraine may get some of the action.
            But again what does Putin have to offer?

          • туфтуф

            But its not fair to the Chinese. They illegally occupied Tibet and got international recognition for that. Why punish them so severly?

    • RedSquareMaidan

      When will Russians learn they don’t have to suffer for their president?

      • Dagwood Bumstead

        Never! They still have the serf mentality- it’s as if Aleksandr II didn’t abolish serfdom in 1861. The Bolsheviks re-introduced it of course, but under different names- sovkhozes, kolkhozes, Gulag etc. The end result, however, was the same: the New Serfs.
        And thus they will happily suffer for the dwarf. And the more they suffer, the more they will worship the dwarf as a demi-god.

    • Andrew Chimilewsky’s Daddy!

      Ah, oh… you wish, trolly.

      • Alex George

        Of course he wishes sanctions to continue – so does every moral and decent person. Putin doesn’t, of course nor his oligarch cronies. but their attempt to rely on Trump to look after their interests has failed. Trump is losing interest in Russia and those who did deals with it like Flynn and Manafort are out.

        And yes Putin wil be crushed by sanctions, because he is too stupid to know how ot deal with them or get them lifted. Unfortunately he is gong to drag Russia itself down with him, but that is his own fault, and the fault of the Russians who were silly enough to take him as their leader.

        • Andrew Chimilewsky’s Daddy!

          Yawn… you are a REAL TROLL, responding to everyone post, 12-15 hours a day. WOW… you are sick. Get out of house sometime old man.

          • Alex George

            And once again, we see that the troll cannot answer or refute any arguments.

            If you disagree with anything in my post, try presenting facts and reasoned arguments as to why. But you can’t do that, can you.

  • veth

    Polish PM hit by ‘car-crash’…………….

  • туфтуф

    Ukraine needlessly worried it will lose 10% of its budget if Nordstream II gets built.

    http://www.forbes.com/sites/kenrapoza/2017/02/09/russias-baltic-sea-pipeline-scares-the-life-out-of-ukraine/#5c5cd101336b

  • туфтуф

    99 years ago to the day, Donetsk Krivoy Rog was officially declared Russian. https://uploads.disquscdn.com/images/97a093a57b662a39c9487fb7dd50cf373cd1565684c30bda0d5c00568e73e687.jpg

  • туфтуф

    Breaking news: the US internet company Google recognises Russian territorial sovereignty over Crimea.
    https://uploads.disquscdn.com/images/2f2fc05603064db7f3e65e8c175e4e9841f02dc8d418d3ef6f1e8d05200cd8d9.jpg rimea.

  • туфтуф

    “Sanctions are the consequence of Russias own actions and a LIMITED means…..” Agreed.

  • Andrew Chimilewsky’s Daddy!

    The external contour of the Ukrainian crisis has been won by Russia over the past two years of the Minsk Agreements. Similarly, the internal contour is practically won. The Minsk Agreements were entirely consciously written in such a way so that any attempt to implement them would lead to conflict between the oligarchical government in Kiev and its armed Nazi support. The longer and more actively that Kiev tries to maneuver in the international arena, the stronger these maneuvers stimulate internal political contradictions.

    Then all that remains is waiting for the moment when the contradictions accumulated in Ukrainian domestic politics will blow up the boiler of virtual stability.

    • Alex George

      Except that isn’t happening, is it? Far from blowing up, Ukraine is getting more stable with each month that passes. More and more o fthe corruption problems that are Ukraine’s heritage from Moscow rule are getting located, exposed and cleaned out. The Ukrainian economy is getting stronger while Russia’s is getting weaker.

      There is no “armed Nazi support” in Ukraine. Nazis are very few in number (particularly compared to in Russia). There is however the Ukrainian military, all of whom on the front line are contract soldiers (i.e. volunteers). The Russian army has repeatedly shown that it cannot overcome the Ukrainian Army.

      The Minsk agreements bought time for Putin when his offensives failed in February 2015. He desperately needed a breathing space. Since then, he has done his best to bring Ukraine down, but has failed at every attempt and only made her stronger.