Is­rael pays a high price for Rus­sia sanc­tions


The Rus­sian an­nex­a­tion of Crimea in 2014, the down­ing of a civil­ian air­craft (Malaysia Air­lines Flight 17), and the Rus­sian mil­i­tary ag­gres­sion in Ukraine were with­out doubt se­ri­ous vi­o­la­tions of the in­ter­na­tional or­der that re­quired a pow­er­ful re­sponse from West­ern pow­ers. But what is the right re­sponse – and who might be af­fected other than the in­tended tar­get?

For the past year, the de­bate on Rus­sia sanc­tions has dom­i­nated the for­eign pol­icy de­bate in the US. Var­i­ous ini­tia­tives in­tro­duc­ing ad­di­tional sanc­tions poli­cies have been pro­posed by both the ad­min­is­tra­tion and Congress. Europe, too, is ex­am­in­ing both how to man­age ex­ist­ing sanc­tions poli­cies and whether to in­tro­duce new ones.

Sanc­tions are pow­er­ful for­eign pol­icy tools. How­ever, they can, if mis­used, dis­rupt global value chains. A politi­cized de­bate risks un­der­min­ing the sanc­tions pro­gram it­self – and can in­flict un­in­tended eco­nomic con­se­quences on a num­ber of coun­tries.

Be­cause of the risk of caus­ing global fi­nan­cial tur­moil, the US Trea­sury Depart­ment is ap­pre­hen­sive about ex­pand­ing sanc­tions on the Rus­sian sov­er­eign debt mar­ket. This poses a dilemma for the Trump ad­min­is­tra­tion, as pres­sure from Congress for ad­di­tional sanc­tions is mount­ing in Wash­ing­ton.

Sanc­tions have amounted to the freez­ing of as­sets, travel bans for in­di­vid­u­als des­ig­nated as mem­bers of the Rus­sian elite, sus­pen­sion of EBRD loans, a ban on large pub­lic banks and de­fense cor­po­ra­tions, a mil­i­tary equip­ment em­bargo, and a ban on ex­ports of dual-use items. These sanc­tions, although tar­geted, have been costly not only for Rus­sia but also for the economies do­ing the sanc­tion­ing.

A re­search pa­per by the Kiel In­sti­tute for the World Econ­omy has cal­cu­lated that Ger­many bears al­most 40% of the West­ern trade loss, com­pared with merely 0.6% in­curred in the United States. This is in­dica­tive of strong “friendly fire” ef­fects of the eco­nomic sanc­tions on Rus­sia.

In a new pol­icy pa­per, we at the Euro­pean think tank ECEPR have ex­tended this scope by look­ing at ef­fects on trade with Rus­sia on the two West­ern economies that have not en­gaged in the sanc­tions, namely Is­rael and Switzer­land. One might have ex­pected these two economies to have in­creased their ex­ports to Rus­sia sub­stan­tially, since Rus­sia was hin­dered in trad­ing with other West­ern economies. In­stead, we find that the ex­ports of non-sanc­tion­ing economies were hurt by the sanc­tions al­most as much.

By ob­serv­ing trade vol­umes un­til the end of 2016, we find that ex­ports to Rus­sia by the four largest sanc­tion­ing states (the US, Ja­pan, Ger­many and the UK) fell to 70% of pre-sanc­tions lev­els. The re­duc­tion in Switzer­land and Is­rael is re­mark­ably sim­i­lar, with their av­er­age ex­ports fall­ing to 74% and 75%, re­spec­tively, of pre-sanc­tion lev­els.

The ex­pla­na­tion seems to be that Is­rael and Switzer­land are part of the same global value chains as other West­ern economies. The ex­port losses of Is­rael and Switzer­land amount to no less than $680 mil­lion and $2.3 bil­lion, re­spec­tively.

The sanc­tions, so far, have had a lim­ited ef­fect on Rus­sian pol­icy, while cre­at­ing a heavy bur­den on US al­lies. A re­port by the Cen­tre for Euro­pean Pol­icy Stud­ies sug­gests that Rus­sian Pres­i­dent Vladimir Putin’s pop­u­lar­ity has risen to its high­est-ever point dur­ing the course of the sanc­tions – not an un­com­mon side ef­fect of iso­la­tion poli­cies.

The in­ter­con­nect­ed­ness of global value chains com­pli­cates im­ple­men­ta­tion of tar­geted sanc­tions. On the up­side, global value chains pro­vide strong forces for the fa­cil­i­ta­tion of global se­cu­rity. This is, of course, even more rel­e­vant in the modern global econ­omy, in which global value chains re­flect in­creased in­ter­de­pen­dency among na­tions.

Pol­i­cy­mak­ers in Wash­ing­ton should con­sider that trade fosters long-term global sta­bil­ity, and that the arse­nal of eco­nomic sanc­tions will be de­pleted once Rus­sia is fully alien­ated from the West. As the 19th-cen­tury econ­o­mist Otto T. Mallery wrote: “If goods don’t cross bor­ders, sol­diers will.”

Dr. Nima Sanandaji is pres­i­dent of ECEPR. He holds a PhD in en­gi­neer­ing from the Royal In­sti­tute of Tech­nol­ogy, Stock­holm, and is well known for a stream of com­pre­hen­sive pol­icy re­ports and books on en­ter­prise and pub­lic ad­min­is­tra­tion.

Den­nis Avorin is a mas­ter in in­ter­dis­ci­pli­nary re­search and stud­ies on East­ern Europe at the Uni­ver­sity of Bologna, with a spe­cial fo­cus on Rus­sian for­eign pol­icy and tran­si­tion eco­nom­ics. He has pre­vi­ously served as desk of­fi­cer at the Swedish For­eign Min­istry.

Ju­dith Levy has a masters de­gree in in­ter­na­tional re­la­tions from the Uni­ver­sity of Ox­ford, with a spe­cial fo­cus on Is­raeli mil­i­tary and strate­gic his­tory. She is the English pub­li­ca­tions ed­i­tor at the Be­gin-Sadat Cen­ter for Strate­gic Stud­ies.

PEO­PLE WALK past the GUM depart­ment store, dec­o­rated with fes­tive lights for the New Year’s Day and Christ­mas sea­son, in Moscow’s Red Square.

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