An Economic Sanctions Menu Targeting Russia

As Russia fosters heightened instability in the eastern portions of Ukraine [0], we should be considering what methods will impose maximum pain on Russian policymakers. Already, the Russian economy has taken a hit, even while in an already fragile state.[1] [2]

From Robert Kahn at CFR:

Direct bans on business trade and investment can meaningfully reduce Russian wealth and growth, but the most powerful effects on Russia stem from financial sanctions. In part, this reflects the inherent importance of finance for cross-border trade and investment. More specifically, the complexity of Russian entities’ financial dealings with the West creates the potential for forced, rapid deleveraging—an intense “Lehman moment” of the sort witnessed in global markets after the failure of Lehman Brothers in September 2008. Tightening of know-your-customer and anti–money laundering rules can be chilling even without a change in law, discouraging Western financial institutions from taking on Russian clients. Blocking Russian banks from accessing international payments systems will also affect investments, and can make it difficult for Russians to invest and save. (A temporary halt in payments services to Rossiya, the sanctioned Russian bank, had immediate effects on the Russian payments system and led to rushed plans by Moscow to develop an alternative payments system.) Credit limits will be reduced and projects halted. Already there is anecdotal evidence that companies doing business with Russia are becoming more cautious, waiting to see whether there will be new, harsher sanctions.

For some statistical analysis of the efficacy of financial sanctions in pursuit of goals other than regime destabilization, see Dashti-Gibson, Davis and Radcliff, American Journal of Political Science, 1997.

While most forecasters have not marked down Russian growth to the negative range (IMF has just marked down 2014 growth by 0.6 ppts since just the January forecast, but still projects positive 1.3 ppt y/y growth [3]. Roubini Global Economics (4/4/2014) forecasts a decline from 0.5 ppt q/q annualized growth in Q1 to -1.4 ppt in Q2, and continued negative growth in the subsequent quarters, even in the absence of a military confrontation. Hence, with heightened uncertainty and a depressed economic conditions, the Russian economy is probably more vulnerable to external pressure — financial sanctions and the threat thereof — than is typically thought. There is also the direct fiscal costs of assimilating and financially supporting newly seized Crimea, approximately $7 billion per year, or 1% of GDP, according to Roubini Global Economics. That’s a diversion of fiscal resources that will not be available for countercyclical measures.

Clearly, there is a possibility of retaliation [4], with potentially measurable impact on European economies, but such measures could impose even greater pain on the Russian economy. So the question is whether retaliation is credible.

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22 thoughts on “An Economic Sanctions Menu Targeting Russia

  1. jonathan

    I’m somewhat unclear about the desire for sanctions. As of this moment, how many people have died? I believe the answer is less than 5 in Crimea and E. Ukraine, more in Kiev but that was anti-Ukraine’s government and could rationally be considered as separate.

    I have to ask the following questions:

    1. Is this really our business? If we’re still in the business of “spreading democracy” after 2 seemingly endless wars, I’m unclear how sanctions over the territorial integrity of a country is the same thing. Crimea apparently voted to leave Ukraine and also to join Russia. Isn’t that democracy? As for E. Ukraine, I have no idea what will happen, but since people aren’t dying I wonder why we have a need to get involved.

    2. If we’re interested in maintaining at least an illusion of US “superpower” abilities, would imposing sanctions support or weaken that goal? Again, since people aren’t dying, I’d say there’s a substantial risk we’d be weakening our future power by showing the limits of what we can do and what we are willing to do. If you want people to be afraid of you, you don’t want to play a weak hand and you don’t want to show that you’re actually unwilling to do more (than some sanctions and symbolic military gestures like moving some planes around).

    1. Patrick R. Sullivan

      Speaking of superpower illusions, in 1994 Bill Clinton and Boris Yeltsin got Ukraine to give up the nuclear weapons on their soil, by signing an agreement to ensure Ukraine’s territorial integrity. Vladimir Putin has just spit on that agreement, and Obama has done….

    2. Nick G

      Vancouver is 30% Chinese. If china invaded Canada, and declared a referendum on Vancouver joining China, would that be democracy?

      If Venezuela invaded Florida, and declared a referendum for Miami, would that qualify? How about Iran in eastern Saudi Arabia?

      You’re not allowed to snap off pieces of other countries with large ethnic minorities, and add them to your country.

    3. baffling

      jonathan,
      “Crimea apparently voted to leave Ukraine and also to join Russia. Isn’t that democracy?”
      I suppose you have the same view if California, or Texas, or Kansas held a vote and decided to secede? Why then does russia not respect the votes for independence in chechnya and georgia? you have a pretty weak argument here. you need to support legitimate democracy, not manipulated votes.

      obama has made it clear he does not want military intervention, at least from the us. that should be led by ukraine and europe. i don’t see how sanctions really weaken our hand. they are a very powerful tool to inflict damage. in fact, one could argue economic warfare will replace military warfare between nuclear superpowers in the age of mutual annihilation. and you could see cyber warfare on a larger scale as well.

  2. randomworker

    The threat is always that Russia will turn off the gas. 1/3 or so of the natural gas used by Germany is from Russia. I think it is a greater percentage in Eastern Europe. So yes, it would be a shock…at first. But who are they going to sell the gas to if they don’t sell to the Germans? The Iranians? lol.

    Somebody needs to call their bluff at some point.

  3. mclaren

    75% of the people in the Crimea speak Russian. Culturally, these people consider themselves part of Russia. Why is this our business?

  4. Ricardo

    Europe has no stomach for serious sanctions against Russia. It doesn’t matter much what the US does because the gains Putin will realize by taking Ukraine will far outweight any pain of sanctions. If Putin’s moves are seen as anything other than a long-term investment, the anaylsis will not mean much, and it actually appears that Europe is not much concerned that Russian control of the area would be much different from the current situation, perhaps even more stable.

    Since the US has taken away the ability of the countries of eastern Europe to protect themselves, they are all ripe for the picking and Putin seems to be ready to harvest.

  5. Anonymous

    I love how the Ukrainian Govt has labeled its own citizens as “terrorists” and will begin executing them, yet we claim “Russia” is the enemy because they are welcoming in people who wish to join them.

  6. Joel

    “I suppose you have the same view if California, or Texas, or Kansas held a vote and decided to secede?”

    Yes I do and it’s in the U.S. Constitution.

    “Why then does russia not respect the votes for independence in chechnya and georgia? you have a pretty weak argument here. you need to support legitimate democracy, not manipulated votes.”

    The Ukraine ‘vote’ to ‘depose’ Yanukovych was ‘manipulated’ at gunpoint, so the Ukrainian so called Democratic Government was not legit. Georgia is in fact a completely independent state, (minus the (legit) ‘vote’ of the Ossetians to leave and join Russia). Chechnya had an opportunity to ‘stay’ a completely independent nation in the early 1990s (before their ethnic cleansing of Russians and others), and once again in the late 1990′s to be an completely independent state (again), but lost that liberty (for the time being) when it became belligerent (again) by invading Russian Dagestan.

    ” i don’t see how sanctions really weaken our hand. they are a very powerful tool to inflict damage. in fact, one could argue economic warfare will replace military warfare between nuclear superpowers in the age of mutual annihilation. and you could see cyber warfare on a larger scale as well.”

    As long as economic sanctions are only directed against those ‘Commie-nests’ huh?

    Orwell said it best….

    “The war, therefore if we judge it by the standards of previous wars, is merely an imposture. It is like the battles between certain ruminant animals whose horns are incapable of hurting one another. But though it is unreal it is not meaningless. It eats up the surplus of consumable goods, and it helps to preserve the special mental atmosphere that the hierarchical society needs. War, it will be seen, is now a purely internal affair. In the past, the ruling groups of all countries, although they might recognize their common interest and therefore limit the destructiveness of war, did fight against one another, and the victor always plundered the vanquished. In our own day they are not fighting against one another at all. The war is waged by each ruling group against its own subjects, and the object of the war is not to make or prevent conquests of territory, but to keep the structure of society intact. The very word “war,” therefore, has become misleading. It would probably be accurate to say that by becoming continuous war has ceased to exist. The peculiar pressure that is exerted on human beings between the Neolithic Age and the early twentieth century has disappeared and has been replaced by something quite different. The effect would be much the same if the three superstates, instead of fighting one another, should agree to live in perpetual peace, each inviolate within its own boundaries. For in that case each would still be a self-contained universe, freed forever from the sobering influence of external danger. A peace that was truly permanent would be the same as a permanent war. This–although the vast majority of Party members understand it only in a shallower sense–is the inner meaning of the Party slogan: WAR IS PEACE.”
    ― George Orwell, 1984

    1. baffling

      joel,
      “Yes I do and it’s in the U.S. Constitution.”
      you are blatantly incorrect. the constitution provides for entry into the union, it does not provide for an exit. we fought a civil war over this issue.

      you have the situation in ukraine wrong as well. russia invaded the crimea, and at gunpoint held a referendum on secession. you call this a democracy? now they move soldiers to the eastern ukraine border, point a gun and say let them vote as well? not a democracy in action.

  7. Anonymous

    “we should be considering what methods will impose maximum pain on Russian policymakers. ”

    I reject this premise. Have you gone full blown neo-con? This isn’t our war.

  8. Anonymous

    “russia invaded the crimea, and at gunpoint held a referendum on secession”

    You are truly delusional.

  9. Marco

    Baffling,

    After the blunders (to put it mildly) in Iraq and Afghanistan, do you really think that the US should intervene in any manner in Ukraine? I know that two wrongs don’t make a right, but do you have any doubts that in 5 years we’re going to see tha US (again) caused more harm than good? I know that Russia is blowing this out of proportion, but there are some really nasty (to put it mildly) figures in their new senior government. Why risk supporting something that can go horribly wrong (again)?

  10. baffling

    marco,
    i do not advocate military action. but i have no problem with economic sanctions. there are no rules which says i need to do business with every country. or put another way, i can define the rules of my business partners, and they can either agree with them or they can choose not to do business with me. that is russia’s choice with respect to economic sanctions.

  11. Barkley Rosser

    Jonathan,

    Patrick Sullivan has it right. The US and UK (and France and China and Russia) agreed to respect the “terrirtorial integrity of Ukraine” if it gave up its nuclear weapons, which it did, to Russia. That is what our interest is in this. Is Iran to respect a similar promise if they agree not to pursue nuclear weapons in the fact of the failure to support this agreement?

    There were demonstrations in Maidan Square before Yanukovych was voted out, but the guns were being fired by pro-government snipers on rooftops againsgt the demonstraters. You have your facts wrong.

    Also, it is not true that Crimea “voted to leave Ukraine.” The real problem with the referendum was not that it was “at gunpoint” but that the only two options on it were independence or joining Russia. This is why although polls suggest that about 60% of Crimeans supported joining Russia, over 90% voted to do so in the referendum. The really serious alternative of staying in Ukraine was smply not offered. This was a fraudulent referendum.

    Anonymous,

    Current polls suggest that while a majority of eastern Ukrainians speak Russian, a minority, 30-40% are ethnic Russians, and only about 10-20% support leaving Ukraine to join Russia. This is a very different situation from Crimea, which arguably was given by Khrushchev mistakenl in 1954 to Ukraine. As it is, armed masked men have seized control of government buildings and now in fact killed people. Putin is demanding that the Ukrainian governmnet not remove these terrorists by force, but he would not resist such a movement if somebody pulled this in Russia. Your claim that there is this great cry by people to join Russia is baloney. It is a group of masked armed men killing people who come near them who are doing so. What many support in the region is some increased autonomy, but neither full independence nor joining Russia. I understand why someone as badkly informed as you is posting anonymously.

    Joel,

    It was not Chechnya that invaded Dagestan, but a ragtag international group of Islamic militants numbering about 1500, who were easily beaten back. While it is regularly claimed that this “triggered” the second Chechen War, the Russians did not invade Chechnya until after this group had already been defeated. Civilian casualties are estimated to be in the hundreds of thousands, with the minimum number put at 150,000. Putin does not look at all good there, not at all. He is a lying hypocrite and violater of serious international agreements. The matter of possibly imposing stricter sanctions is to try to prevent him from going further in his violation of international law by invading an area that does not wish to join his country.

    Barkley Rosser

  12. Hans

    Sanctions will not work. The Big O needs to draw a red line (or a blue line UN style)
    since it is now after the elections as he had mentioned to Putin.

    Now on their Ukrainian tour – Peter, Paul and Putin.

  13. Anonymous

    Baffled

    ” there are no rules which says i need to do business with every country. ”

    Then don’t do business with Russia. But your real goal isn’t to not do business with Russia, you want to reduce other American’s quality of life by preventing them from doing business with Russia. Why do liberals always insist on reducing American’s freedoms?

    The fact of the matter is Russia supplies way too much nat gas to EU for anyone to do anything about it. Putin knows this and will do as he pleases.

    1. baffling

      Anonymous, I find it baffling how you can make the Ukraine-russia issue into liberal politics. Reagan didn’t do business with the soviets, so he must be a liberal as well, imposing his view on hard working Americans. Your political ideology is limitless!

  14. Anonymous

    Barkely,

    Fair enough, either way, it’s not worth 1 American life or tax dollar to interfere in.

  15. 2slugbaits

    Patrick R. Sullivan Speaking of superpower illusions, in 1994 Bill Clinton and Boris Yeltsin got Ukraine to give up the nuclear weapons on their soil,

    This is true. But if I were Vladimir Putin I wouldn’t want to bet the farm that Ukraine is actually nuclear free. Ukraine did give up all of its strategic nuclear weapons and they gave up around 5,000 smaller low yield tactical munitions. The problem is that Putin can’t know for sure that Ukraine did not keep some low yield tactical munitions just in case. And Ukraine certainly has the ability to enrich uranium from one of its many nuclear power plants that were built after the 1994 agreement. Ukraine may or may not have tactical nuclear munitions in its arsenal today; but Putin surely knows that Ukraine could have built them if it wanted to. And that’s something that Putin needs to consider. Giving up strategic ICBMs was tantamount to giving up nothing because there was no plausible scenario in which Ukraine would ever threaten Moscow with those strategic weapons. But keeping a small tactical nuclear munitions arsenal (e.g., nuclear artillery shells) used for defense-in-depth is a very different matter. The Ukrainian army would not be a pushover even without resorting to tactical nuclear munitions; but if pressed against the wall in a losing defense-in-depth strategy, the Ukrainians might not have a choice. Then what does Putin do? Just sit back and accept several thousand Russian casualties on Ukrainian soil?

    Joel As much as I would like to hope that someday Texas and Mississippi and Alabama will actually secede (here’s your hat, what’s your hurry), I’m afraid it will never happen. The Preamble’s phrase “to form a more perfect union” has always been interpreted to mean that states could not leave the union, unlike the old Articles of Confederation. The phrase “more perfect” was the 18th century’s way of saying it could not be dissolved.

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