How Far Are Western Sanctions against Russia Going?

Published in RBC Daily, Moscow

August 4, 2014

The novel Western sanctions against Russia because of Russia's military aggression against Ukraine are usually discussed in immediate policy terms: What will the West do if Russia does this or that? Economic sanctions have however become quite a science. There are many regularities, and inertia is great.

A big problem in the current situation is credibility. The Kremlin does not think the West will impose more sanctions, and the West does not believe it must impose more severe sanctions to stop the Kremlin from doing something so obviously damaging to Russia. Because of this credibility chasm, sanctions are bound to be escalated.

Washington...favor(s) limited and targeted sanctions that hurt the relevant forces in Russia rather than the population and economy at large.... [T]his comes down to three forms of sanctions: armaments, finance, and high technology.

The United States is coordinating closely with the European Union to achieve maximum effect, but US tardiness has convinced the Kremlin that the United States is not serious. But that is how sanctions are traditionally built up, step by step. Arguably, a swift imposition of sanctions would be more credible and thus more effective. Yet, we are likely to see a slow aggravation of sanctions, as the Kremlin does not believe in the West being serious, and the West records no Russian act meriting anything but further escalation.

Two colleagues of mine at the Peterson Institute for International Economics, Gary Hufbauer and Jeffrey Schott, have studied economic sanctions for decades. Their third edition of Economic Sanctions Reconsidered (2008) studies 204 cases of economic sanctions after World War II.

Among these cases, 34 percent were successful, but most economic sanctions did not achieve their aim. The most successful sanctions were those aimed at modest policy changes (51 percent success), while the least successful (21 percent) aimed at disrupting military adventures. Attempts at regime change and democratization succeeded in 31 percent of the cases.

This study contains many other conclusions. Universal sanctions are far more effective than others, which is the reason why the United States is so keen to pursue sanctions through the United Nations, to which it otherwise devotes little attention. With regard to Russia, this is a reason why the United States tries to coordinate with the European Union far more than in recent memory.

When sanctions have been adopted and do not work, it is extremely difficult to get rid of them; a political constituency evolves that wants results rather than backtracking. An excellent example of failed sanctions is the nearly complete US trade and financial sanctions against Cuba. An important lesson for the United States is that it is much better to adopt sanctions through executive orders issued by the President, as is the case with Russia, rather than through law adopted by Congress, as is the case with Cuba.

As Russia abandoned the post–Cold War order in Europe by annexing Crimea, the United States and Europe had no choice but to react. The easiest option is always to provide financial assistance to the suffering party, and the International Monetary Fund concluded a standby agreement with Ukraine with $17 billion of credits as early as March, and about as much as additional funding from other donors is expected.

Yet, economic assistance does not protect Ukraine from the Russian military aggression. If Ukraine had been a member of NATO, the other NATO members, including the United States, would have been obliged to send troops in accordance with Article 5 of the NATO statutes. But Ukraine is not a member of NATO, and the American appetite for foreign military engagements is very limited after the wars in Iraq and Afghanistan. Western countries are reluctant to send even military supplies to Ukraine, even if minor amounts of nonlethal assistance are being delivered.

That is where sanctions come in. In March, both the United States and the European Union initiated personal sanctions, which have become increasingly popular. The idea is that the West should go after the actual culprits and not a whole nation that does not even have democratic rights to express itself. In particular, this model has been applied to Belarus President Alexander Lukashenko and those in his closest circle. These people are refused visas and face the freezing of their financial assets in the countries sanctioning them.

A novelty in the US sanctions that the European Union has taken up as well is to go after "crony" businessmen who make their money through close personal connections with the leadership in the Kremlin and their enterprises.

One effect of the far-reaching economic sanctions against Saddam Hussein's Iraq and Slobodan Milosevic's Yugoslavia was that these leaders reacted by strengthened their economic and political controls through a monopoly of smuggling using cronies and state companies. This has made Western experts on sanctions draw two broad conclusions.

One is that cronies and state companies should be sanctioned, but not ordinary private enterprises. Therefore, even big Russian oligarchic companies at a certain distance from the Kremlin have not been sanctioned. Another broad conclusion is that general trade sanctions should be avoided.

In the current discussion on sanctions in Russia, the view is that the West should hit Russia where it hurts the most and the West the least. Considering that Russia's GDP is only one-tenth of the European economy and one-twentieth of the NATO economy, the West can act in many ways to hurt Russia more than the West.

Two big exceptions on types of sanctions have been made. One is trade sanctions. Strangely, while the West does not carry out trade sanctions, Russia does ever so often despite being the weaker party. This is an unwise policy, which may hurt Russia more than Western sanctions.

The other big exception is sanctions on energy, both on oil and natural gas. Were the West to limit Russia's exports of oil or gas (as it has done with Iraq and Iran), it would shoot itself in the foot. Oil prices would rise, and Russia could actually benefit more from price hikes than it would suffer from shrinking exports.

Sanction thinkers in Washington say that they want to use the scalpel rather than the sledgehammer. They favor limited and targeted sanctions that hurt the relevant forces in Russia rather than the population and economy at large. Apart from sanctions against specific people and enterprises, this comes down to three forms of sanctions: armaments, finance, and high technology.

The most surprising aspect about the US sanctions against Russian armaments companies was that they were adopted as late as July 16, and they are not yet complete. The United States hoped for coordination with Europe, which it achieved last week.

Clearly, the dominant Western sanctions against Russia will be financial. The current application of financial sanctions against Iran is considered successful, although no agreement has been reached with Iran on nuclear disarmament as yet. Because the Western world maintains its dominance in global finance, it is difficult to make any international transaction without using the US dollar or the euro, and then US and EU financial regulations apply. Financial sanctions have the additional advantage that they can be escalated in many steps in different directions.

In Washington, the Cold War Coordinating Committee for Multilateral Export Controls (COCOM) restrictions on high-tech exports are remembered fondly. The United States dominates the world of high tech more than ever. Little can be done without a US patent, and the old export controls can easily be applied. The problem is that the effects are not immediate but long term. The longer the Russia-Western conflict over Russia's aggression in Ukraine lasts, the more technology sanctions are to be expected.