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Do Barack Obama and Angela Merkel Even Know What They Want From Russia?

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Posted on Sep 2, 2014

By Ivo Mijnssen and Philipp Casula

  A Russian armored personnel carrier crosses a field about 6 miles from the Russia-Ukrainian border control point at Donetsk. AP/Pavel Golovkin

Before heading off to celebrate the Labor Day weekend, President Barack Obama took to the podium in the White House briefing room to blast Moscow. “Russia is responsible for the violence in Eastern Ukraine,” he said. “The violence is encouraged by Russia. The separatists are trained by Russia. They are armed by Russia. They are funded by Russia. Russia has deliberately and repeatedly violated the sovereignty and territorial integrity of Ukraine. And the new images of Russian forces inside Ukraine make that plain for the world to see.” The sanctions imposed by the West are devastating the Russian economy, the president claimed, and, therefore, he promised “more costs and consequences for Russia.”

The extent to which Russia is responsible for the crisis in Ukraine is a matter for another article. What is much clearer, and more often overlooked, is that those sanctions championed by the president are clearly not working, unless their desired effect is to make life more miserable for the workers and consumers of Europe, Russia and, most importantly, Ukraine.

Five months after the European Union imposed the first sanctions on Russia, Dutch Prime Minister Mark Rutte acknowledged Friday that they had “not worked.” The conclusion is not surprising in light of failed Russian-Ukrainian talks and Moscow’s evermore direct involvement in the conflict. In reaction, EU leaders have announced their intention to further tighten sanctions. Jose Manuel Barroso, the outgoing European Commission president, even cautioned at a summit in Brussels on Saturday that “we may see a situation where we reach the point of no return,” and Lithuanian President Dalia Grybauskaite escalated the rhetoric at that same meeting, warning of “war” between Russia and Europe. The exact goals sanctions are supposed to reach and whether they are the appropriate tool at all remain unclear.

Western governments, led by the European Union and the United States, first imposed sanctions on Russia in March. As events unfolded in Eastern Ukraine, escalating into a civil war, and especially since the mid-July downing of a Malaysian airliner by one of the belligerents, those Western governments that had initially been hesitant stepped up their measures against Russia, expanding the list of entities and persons targeted by asset freezes and visa bans. Key Western governments, including Australia, Canada and Norway, have imposed their own sanctions that are closely linked to those of the U.S. and the European Union. Even neutral Switzerland has implemented its own package.

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The declared aim of the Western sanctions is to push Russia to a de-escalation of the crisis in Ukraine. However, it remains rather murky which steps exactly Russia has to take that would be regarded as sufficiently defusing. Secondly, history casts doubt that sanctions are a tool that can actually bring some form of de-escalation.

The costs of these policies for the Europeans are much larger than those for the United States. The European Union is not only closely linked to Russia economically, it is also more vulnerable to countersanctions. In 2013, EU countries exported goods valued at $160 billion to Russia—compared with U.S. exports of about $12 billion. The European Commission estimates the costs of sanctions for European companies at roughly one-third of total exports per year. Large European economies’ growth rates, still recovering from the financial crisis, will most certainly suffer, and the sanctions might contribute to a further slowing down of European economies.

The Russian ban on food imports (mostly from the European Union) announced last month has hit exporters of agricultural goods hard, particularly Greece and Poland. Estimates put the price tag at $7 billion in reduced exports, with additional losses because of lower prices in domestic markets. The European Commission has already decided to compensate for the losses of specific producers.

The effects of this ban on Russia are less apparent. Russian producers will be able to substitute for at least part of the losses, but many consumers fear that quality standards will suffer as a result of the quick transition. Latin American countries, such as Argentina, Ecuador and Brazil, in particular seem eager to fill the gap left by European producers, but they have to consider the political costs of such a move, as they have a strong interest in Western markets. Additional food imports may be funneled through third countries like Belarus. Moreover, many economic observers fear that Russia’s inflation will worsen if food prices rise: Compared with the beginning of the year, it has already doubled to 11.2 percent in the food sector.

Overall, the sanctions on both sides appear modest so far, because they explicitly exclude the crucial energy sector. Although some technology used in gas and oil extraction and Crimean energy companies are featured on the Western list of sanctions, neither Europeans nor Russians seem interested in further politicizing this aspect—understandable in view of the extreme mutual dependence. U.S. and European oil giants, first and foremost Exxon and BP, have billions invested in Russian joint ventures, stakes that they do not want to have jeopardized. Sanctions in the energy sector are a double-edged sword for both sides—whoever wields it gets cut.

So far, sanctions clearly do not work: Russian oligarchs have enough assets to make up for the losses resulting from the restrictions imposed on them. Consumers in Moscow and St. Petersburg will have to get used to meat from Argentina instead of meat from the U.S. and possibly, to price hikes. Unless the sanctions become systemic and include whole sectors of the economy, their power will remain limited. On the political level, however, there is an obvious dissatisfaction among those directly targeted by the sanctions.


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