Guessing game
Sanctions against Russia could prove to be a double-edged sword
Russia’s oligarchs were in crisis mode even before Vladimir Putin invaded Ukraine. They must be in panic mode now.
Last year, capital flight by Russia’s elite — the money they send out of the country — amounted to about $15.5-billion. In January this year, another $4.2-billion flew out of Russia.
Financial analysts believe that number has soared on the back of the Ukraine invasion.
It is just one indication of where the Russian president is extremely vulnerable — the economy.
Economists and political experts say it is within the powers of the West to squeeze Mr. Putin so hard the strongman is brought to his knees. They believe the West has the tools needed to curb his expansionist tendencies and punish him for invading a sovereign country. They also want to avoid a repeat of what happened in Georgia in 2008, when Russia effectively annexed South Ossetia and Abkhazia
“There will be far-reaching change in our relations with Russia — possibly including a broad palette of economic measures — if Russia takes further destabilizing measures in Crimea in addition to those already undertaken, or takes military action,” German Chancellor Angela Merkel said Thursday. “I hope it doesn’t get to that point.” Whether the West has the political will to carry out those actions remains to be seen, but it certainly has the leverage.
“Economically, he’s in a lot of trouble,” said James Nixey, head of the Russia and Eurasia program at Chatham House, a British thinktank. “It makes him very vulnerable indeed.”
He said Russia’s economic problems were legion: low productivity, Soviet-level industry, a declining working population, corruption, capital flight, a brain drain. “The list goes on and on.”
Meanwhile, Russia’s incursion into Ukraine triggered the biggest stock sell-off in five years on Monday. This pulled the ruble to a record low and prompted the central bank to raise interest rates the most since 1998.
Rather than trade sanctions, Mr. Nixey advocates targeting Russia’s shady businesses — which the West generally turns a blind eye to — by introducing laws to make international dealings more transparent.
“There should be a greater degree of stringency of Russian companies interacting with western companies. Companies that have opaque accounting practices or opaque operating practices, we should be guarding against these,” he said.
“[It] is a form of sanctions in a sophisticated way. It has the benefit of being the right thing to do, not just as a response to this particular crisis.”
He proposes legislation along the lines of the Magnitsky Act, passed by the U.S. in response to the death of lawyer Sergei Magnitsky in a Russian prison after he investigated fraud involving tax officials. The law allows the U.S. authorities to deny visas and freeze the assets of those involved with human rights violations.
“You don’t have to argue it from a saintly point of view,” said Mr. Nixey. “You can argue that if we don’t do this, the next time [the problem] will be bigger and bigger. It’s good policy and moral policy.”
Arizona Senator John McCain has already proposed widening the Magnitsky Act to cover events in Ukraine and target businessmen.
“Magnitsky scares the daylights out of these oligarchs that love to
In a game of chicken, if you like, the West will win because Russia will be forced to fold before us
raise their kids in London and spend time in Las Vegas,” Mr. McCain said this week.
Paul Rawkins, senior director at Fitch Ratings, the global debt ratings agency, said one side of the Russia balance sheet was in good shape with low debt and assets. But the other side suffered from a poor investment climate reflecting such matters as poor government, the rule of law and human and property rights.
“Growth in Russia has slowed up quite a lot,” he noted.
“It’s about 1.3% right now and it’s also a time when the rest of the world is picking up. If sanctions are slapped on, then the economy could go into recession.”
Sanctions that would really hurt are a double-edged sword. Russia supplies about 30% of Europe’s natural gas, so many leaders fear it could turn off the tap, as it has done several times to Ukraine.
But half of Russia’s total budget revenue comes from oil and gas.
“The other way [Russia] could retaliate, which is questionable, would be turning off the gas,” said Mr. Rawkins. “Turning off gas supplies wouldn’t necessarily be doing them a favour. The risk of that is that in time Europe would regard Russia as an unreliable supplier and in time would actually think about finding other supplies of gas.”
Mr. Nixey believes Russia would be the loser in any “gas war” because it is more heavily dependent on the West.
“In a game of chicken, if you like, the West will win because Russia will be forced to fold before us,” he said.
“There is a kind of mutually assured destruction relationship here,” said Steven Pifer, a former U.S. ambassador to Ukraine, now an analyst at the Brookings Institution think-tank in Washington.
But he said while Russia may threaten some things, Mr. Putin has to consider what acting on them would do to the Russian economy.
Russia’s dominance in the oil and gas market is already being challenged.
Although it remains the world’s biggest exporter of natural gas, the U.S. recently surpassed it to become the world’s largest natural gas producer, largely because of breakthroughs in hydraulic fracturing technology, known as fracking.
The U.S. does not yet export its natural gas, but the Energy Department has begun to issue permits to American companies to do so, starting in 2015.
Carlos Pascual, a former U.S. ambassador to Ukraine, who leads the State Department’s Bureau of Energy Resources, said although the prospective American exports would not immediately solve the problems in Europe, “it sends a clear signal that the global gas market is changing, that there is the prospect of much greater supply coming from other parts of the world.”
“This is a radically changed market,” he added. “Our challenge is to look at U.S. production in the global context and understand how we can influence what happens.”
Writing in The Daily Telegraph, Fraser Nelson, editor of The Specta
tor said energy was the new “weapon in a new cold war.”
“Of all the weapons in America’s arsenal, its new energy power is perhaps what the Kremlin fears most,” he added.
The U.S. has already announced financial sanctions and travel bans on some Russians. For their part, European leaders have suspended talks with Mr. Putin on a wide-ranging economic agreement — just as they did after Russia’s invasion of Georgia in 2008, only to resume them two months later.
Mikheil Saakashvili, president of Georgia in 2004-13, has said for history not to repeat itself the EU has to toughen its response. But will it? In 1990, during the Persian Gulf crisis, former British prime minister Margaret Thatcher famously told then-U.S. president George H.W. Bush to steel himself over sanctions on Iraq and not “go wobbly.”
“My feeling is that the West, as Mrs. Thatcher said, will go wobbly,” Mr. Nixey said.
“I suspect that memories are quite short and if there is a de-escalation, then you will eventually see that we will de facto forgive and forget because money talks.”