Crimea: The cost of sanc­tions and the risk of re­tal­i­a­tion

Financial Mirror (Cyprus) - - FRONT PAGE - By John Dale Grover

Sanc­tions have al­ready cost Rus­sia one-third of its GDP. As they come up for re­newal, the EU must be wary of back­ing Putin into a cor­ner and forc­ing him to take dras­tic ac­tion, writes John Dale Grover.

On 7 Septem­ber, the Euro­pean Union ex­tended its sanc­tions black­list­ing more than 100 Rus­sian and Crimean of­fi­cials. A few months from now, in Jan­uary 2017, the EU will de­cide on whether or not to ex­tend its eco­nomic sanc­tions against Rus­sian or­gan­i­sa­tions, in­clud­ing sev­eral de­fence com­pa­nies. The of­fi­cials and en­ti­ties tar­geted by pre­vi­ous and on­go­ing sanc­tions were in­volved in the Rus­sian an­nex­a­tion of Crimea in March 2014. The ex­ten­sion of the black­list and the pos­si­ble re­newal of full EU sanc­tions raise the ques­tion of how long Putin is will­ing to ac­cept con­tin­u­ous eco­nomic loss, and whether this pol­icy will lead to any Rus­sian at­tempts at es­ca­la­tion or de-es­ca­la­tion in east­ern Ukraine.

De­spite the ini­tial suc­cess of Rus­sia’s hy­brid war­fare, there are those in Rus­sia — es­pe­cially in Crimea — who now ques­tion the wis­dom of con­tin­ued fight­ing and its im­pact on their liveli­hoods. Crimeans have dealt with in­creased in­fla­tion in food prices and a col­lapse of tourism, a vi­tal sec­tor of the lo­cal econ­omy that had been re­liant on vis­i­tors from the rest of Ukraine.

The Rus­sian peo­ple are not far­ing that well ei­ther. Be­tween 2014 and 2015, Rus­sia’s GDP dropped 34.71% from $2.031 trillion to $1.326trln. Rus­sia’s un­em­ploy­ment has trended only slightly up­ward since Jan­uary 2014 and has re­cently come down to 5.35% as of July 2016. This sur­pris­ingly low fig­ure has led some to ques­tion the va­lid­ity of Rus­sia’s state sta­tis­tics, while others have sug­gested that Rus­sia has sim­ply shed its ex­cess for­eign work­ers. Re­gard­less of which is the case, Rus­sia’s av­er­age house­hold in­come re­mains at a low $500 a month.

On top of ex­ist­ing EU sanc­tions, Wash­ing­ton re­cently ex­panded its sanc­tions in Au­gust to in­clude over 80 ad­di­tional com­pa­nies, in­clud­ing sub­sidiaries of gas com­pa­nies, ship­builders, and com­puter chip man­u­fac­tur­ers. The mil­i­tary-eco­nomic con­sult­ing firm Janes Ships has re­ported that these sanc­tions are likely to wreak a fair de­gree of dam­age on Rus­sia’s de­fence in­dus­try, as they will have less ac­cess to Amer­i­can in­vest­ment and clients. Fi­nally, these costs do not in­clude those self-im­posed by Rus­sia’s re­tal­ia­tory sanc­tions, such as a ban food­stuffs, dat­ing back to Au­gust 2014.

All of this adds up to a dan­ger­ous sit­u­a­tion in which Rus­sia has con­tin­ued to suf­fer un­der the weight of sanc­tions, while Putin has found him­self sur­rounded by a tighter and tighter cir­cle of ad­vi­sors. It is known that Putin had been lob­by­ing to con­vince the EU not to ex­tend its black­list on in­di­vid­u­als or any broader sanc­tions. He has a few months left, but he may well fail, as Germany’s Chan­cel­lor An­gela Merkel has sig­nalled that she would likely want to main­tain them. Mos­cow has al­ways at­tempted to down­play the im­pact of sanc­tions, but the dam­age to Rus­sia’s econ­omy and its abil­ity to sus­tain the con­flict con­tin­ues.

The con­cern for Western pol­i­cy­mak­ers is not just how much pun­ish­ment is “enough”, but also whether im­pos­ing such pun­ish­ment on Rus­sia is worth the po­ten­tial back­lash. Should full sanc­tions be ex­tended, the ball would re­turn to Putin’s court. One op­tion be­fore him would be a car­rot-based ap­proach of of­fer­ing to ease his sanc­tions or mil­i­tary pres­ence in Ukraine or along the Baltic states. This may help Putin achieve some re­lief from sanc­tions, but he may also run the risk of ap­pear­ing weak do­mes­ti­cally, when the con­flict was in­tended to stoke na­tion­al­ism and gar­ner sup­port at home.

The other op­tion would be to in­crease his use of the stick — some­thing Putin is much bet­ter at do­ing. He could cut off gas to EU states as au­tumn and win­ter ap­proach or es­ca­late the sit­u­a­tion in Ukraine. While costly, the lat­ter op­tion to bring about ne­go­ti­a­tions on sanc­tions would be less risky than cut­ting off gas to the EU. If the West re­fused to ne­go­ti­ate on a set­tle­ment and ac­cept a phased re­duc­tion or end to sanc­tions, Putin could raise the spec­tre of an­other fait ac­com­pli in which Rus­sia seizes more Ukrainian ter­ri­tory.

So while it is im­por­tant to main­tain sanc­tions to de­ter fur­ther ag­gres­sion, es­pe­cially against NATO ter­ri­tory, such sanc­tions must not back Putin into a cor­ner, com­pelling him to take more dras­tic ac­tion.

The US and EU should con­sider how to balance de­ter­rence with the need to avoid fur­ther con­flict, es­pe­cially in the months lead­ing up to the re­newal date for sanc­tions. If mu­tual con­fi­dence-build­ing and nor­mal­i­sa­tion mea­sures could be taken with­out re­mov­ing all sanc­tions or ap­pear­ing to ex­cuse Rus­sian ac­tions in Ukraine, then they should be pur­sued.

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