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Agata Gierczak

Is Russia Unstoppable?

Economic sanctions remind the democracy defined by Churchill – it is often futile and may ricochet back, harming the states applying it. However, they remain the only instrument of pressure when diplomatic tools are not working and the threat of bloodshed is in the air.

London City, autor: reway2007, źródło: flickr.com

London City, author: reway2007, source: flickr.com

On Friday, 2 May, the United States and Germany announced that if Moscow interferes into presidential elections in Ukraine scheduled on the 25th of May, they will impose sanctions against key sectors of the Russian economy. Taking into account the clashes – which took place last week in Odessa and resulted in 46 people killed – as well as Slovyansk events – where Ukrainian army has entered already after the action and now there have been held regular battles with separatists – the next repressive steps towards Russia must be done immediately.

If the policy of sanctions is bread and butter for the United States, the European Union leaders have faced quite a difficult choice.

It is enough to take into account their strong economic ties with Russia, and it becomes clear that the potential freezing of the trade turnover with Russia will inevitably lead European partners to huge losses. Moreover, there are no guarantees that economic sanctions will have any effect.

RFERL: “EU Further Expands Sanctions List Over Ukraine’s Crisis”

The analysis of 174 cases conducted by the Peterson Institute for International Economics in Washington shows that economic sanctions, intended to influence the policy change of a country, have not worked in two thirds of the situations. It was also found that sanctions aimed at dampening down smaller conflicts (which can be applied to current events in Ukraine) have yielded expected results only in 20% of the cases!

Thus, the statistics is pitiless though no alternative scenarios exist. Nevertheless, the authors of the report – even though they acknowledge incredibly small chances of getting positive result in stalemates using sanctions – also put forward a set of factors, which in the future could increase the likelihood of success.

First of all, the main mistake of politicians imposing sanctions is the tendency to overestimate their effectiveness and simultaneous neglect of other tools. At the same time, economic sanctions must be necessarily supported by the political will. In the context of the Russian-Ukrainian conflict, certainly the substantial financial assistance as well as know-how are necessary for carrying out the relevant economic and constitutional reforms.

There is nothing new in the fact that the stronger diplomatic and economic relations between the involved countries are, the more the applied sanctions are felt. Therefore, it is highly important that the closest European economic partners of Russia – such as Germany, the Netherlands or Italy – take up a strong position against the Kremlin and become actively involved in the restrictions policy undertaken by the United States.

IPSOS “Majority Of Citizens Surveyed In 11 EU Countries Believe Their Nations Should Do Everything Possible To Support Stability in the Remaining Country of Ukraine”

Moreover, economic sanctions are a less effective tool in case of authoritarian states. Although Russia is quite far from democracy, it is still not monolithic. Russian elite supports Putin because he has been able to achieve political stabilization in multi-ethnic Russia – the economic status quo allowing oligarchs to thrive. The elite, supporting Putin and accustomed to the cosmopolitan style of life, can stop supporting him if they are connected with a really tangible deterioration of their situation.

Personal sanctions, which the US and the EU have already imposed on a narrow circle of people and companies from Putin’s entourage, as in the US case, are on the one hand showing the unwillingness to risk own interests, and on the other hand are likely the to ignite some fear of striking Russian economy and setting Russian society against themselves. If we assume that the second one is true, it is a positive point, but in order to make the sanctions really effective, they must be applied to the fullest extent – this is the next point of Peterson’s report. In this context, it is important to strike the appropriate individuals in the strongest and the most tangible way – not only in material, but also in political terms.

Currently, the US and Germany leaders promise sectoral sanctions, but they do not specify which sectors of economy they mean. Barack Obama has not left off that restrictions will strike military and finance sector. At the same time, we know that they probably will not affect Russia’s petrochemical sector.

The official response of the Russian president and prime minister to imposed and promised restrictions was the imperial rhetoric, considering current crisis as an opportunity to obtain the foreign financing and import independence for Russian economy, as well as to base the economy on domestic production. It is an attractive slogan, as many Russians believe in the feasibility of greater autonomy.

However, experts warn that the isolationism policy constitutes currently a threat for Russia. Independence from foreign loans and international banks is unrealistic in the short-term perspective. The same applies to the idea of a Russian payment system, which might take at least six months even with maximum mobilization. Not so much different is the situation with food, medicine or textiles import. In 2009, Vladimir Putin called it a shame that Russia is 40% dependent on the food supply, and that 50% of medicine taken by Russian patients is foreign. Since that time, there were no significant changes in the field despite the forecasts of Russian authorities. Moreover, the investments in new manufacturing sectors are not the strongest side of the Russian economy. Russia also cannot afford to lose European market for its gas sales, composing two thirds of Russian exports, and revenues from energy exports compose over 50% of Russian receipts. The image of self-sufficient Russia is very ambitious, but in the situation of significant slowdown in economic growth (estimated at only 1.3 % in 2013 and 2014 is likely to bring a recession), it is merely a form of political propaganda.

Thus, the West has the room for maneuver in case of shock therapy, which is still the only reasonable solution, though the expensive one. Indeed, after the annexation of Crimea Russia sees in Ukraine its vital interests and will seek at all costs to return full control over it.

Moscow will proceed as far as it will be allowed by the West in the broadest sense of the word (meaning not only USA, Canada and the EU, but also Japan and Australia).

Economic sanctions can have effect only if they hit where it really hurts and cause the maximum effect. Besides sanctions, the financial assistance to Ukraine must be provided as well – considering the amount of money, realistic approach and logistics. Moreover, it is important that the current economic allies and partners of Russia have managed to see the stakes – the higher values than their parochial interests. If the above-mentioned conditions are fulfilled, it is quite possible that the sanctions imposed on Russia will get in those 20% of successful cases. The only question is whether Western democracies are willing to risk material values in the name of their proclaimed values.
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More about Russia:

Anticipating the Defeat Day [ru]

The new type of war or Russian scenario of Ukrainian seizure [ru]

Also:

The EEU: The Economically Egocentric Union?

Why Russia Just Can’t. A Ukrainian Perspective

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Na co dzień analityk w think-tanku ekonomicznym i konsultantka w zakresie ryzyka politycznego, zainteresowana również kwestiami społecznymi i polityką zagraniczną Polski. Absolwentka MISH na Uniwersytecie Wrocławskim oraz Ekonomii Politycznej na King's College London, doktorantka na SGH. Lubi grać w siatkówkę i uczyć się języków obcych.

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