Economic Warfare between the West and Russia

Since the fall of the Soviet Union the United States has remained the sole superpower in the world and has used its position to undermine Russian power and influence whenever possible while at the same time expanding its influence into old Russian zones of influence. With the creation of the Europe Union in 1993 it has developed into the world second largest economy, a power player in international affairs, and the largest mutual trading partner with Russia. Russia having fell into political and economic abyss after fall of the Soviet Union lost it prestige and respect on the world stage. Within the last 15 years Vladimir Putin has tried to reestablish Russia as a world player once again.

According to Dr. Goran a professor at The International University of Geneva “Especially after 9/11 Putin has consolidated the country and healed it, he reduced the common crime and has helped to deliver better health services. I’ve never heard a Russian say anything bad about him.”[1] When asked if Putin fears a color revolution Dr. Hug from The University of Geneva agrees with Dr. Goran by saying “The issue is that one could imagine that this strange action of destroying all these food stuffs this summer by Putin that were imported illegally, that a population that is not terribly equipped with economic resources would say what do we want with a leader like that maybe we want to get rid of him. This is not currently the type of reaction that one reads about in Russia I think that there is not enough discontent that there could be a color revolution…in the next couple of months or couple of years…but this is a pretty skilled strategy by Putin and his crowd to control major economic actors and the media. I believe that this has a larger part to play in it.”[2]

With this very strong domestic support Putin has been able to act without fear of losing popular support at home and in doing so his grip on power. This led to the interventions of Georgia, the Caucasus region and the most recent incident being the annexation of Crimea and supporting Ukrainian rebels all of which boasted Putin’s popularity in the country. The U.S and the E.U have at first condemned the actions of Russia and then finally attempted to punish Russia through diplomacy and economic statecraft for going against the status qou of appearing as a great power without acting as a great power. Although economic statecraft is viewed as a diplomatic tool it really is a form of warfare, one can believe that the United States and Europe implemented the sanctions as a way to manipulate and weaken Russia, but that Russia will outlast the sanctions and find a way to convince Europe to drop the sanctions without appearing weak while inflicting heavy economic and political damage within the E.U.

Background

The Battle for the Economic Heart of the Ukraine

The revolution in the Ukraine can be traced back to trying to win the economic heart of the Ukraine in 2013 between the E.U’s Eastern Partnership Plan(EaP) and Russia bailout plan.  The EaP was a joint initiative of the EU and its Eastern European partners: Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova and Ukraine. It sought to bring Eastern European countries closer to the E.U while encouraging reforms in the EaP countries for the benefit of their citizens.[3]

The program would have given 600 million Euros as part of the European Neighborhood and Partnership Instrument (ENPI). It served three main purposes:

  1. Comprehensive Institution Building programs aimed at supporting Partner Countries reforms (approximately € 175 million);
  2. Pilot regional development programs aimed at addressing regional economic and social disparities within Partner Countries (approximately € 75 million);
  3. Implementation of the Eastern Partnership multilateral dimension in the

Framework of the ENPI Regional East Program 2010-2013 (approximately €

350 million).[4]

The Russian bailout plan offered a much larger financial package without all of the restrictions; regulations and changes required by the E.U. President Putin offered them “without any condition”:

  1. Russia will buy $15 billion in Eurobonds issued by Ukraine and the Ukraine could see the first $3 billion in less than a week
  2. Kiev would also receive a discount on critical gas supplies from Russian state giant OAO Gazprom of nearly one-third to $268.50 per 1,000 cubic meters through 2019[5]

The Aftermath of Choosing the Russian bailout

Thus President Viktor Yanukovych seeking to prevent a peoples revolution caused by the changes required by the E.U went with the more financially lucrative Russian plan. Although he had popular support in the Russian speaking sections of the Ukraine for the deal there was an even larger population that wanted the Ukraine to take the E.U deal and move further away from Russia. This would be the start of the EuroMaidan uprising. Within 3 months demonstrators calling for the resignation of President Yanukovych began marching in the streets. Between February 18-21, demonstrators said that they would use force if necessary to ensure that the president resigned. On February 22nd the president fled the country to Russia. President Putin said that he did not recognize the new leadership in the Ukraine as this was a coup d’état and that President Yankovych should return to power.

On March first 2014, President Yankovych sent a letter to President Putin requesting that he use Russia’s military to restore law and order in Ukraine stating:

 “Under the influence of Western countries, there are open acts of terror and violence,..People are being persecuted for language and political reasons…So in this regard I would call on the president of Russia, Mr. Putin, asking him to use the armed forces of the Russian Federation to establish legitimacy, peace, law and order, stability and defending the people of Ukraine.”[6]

With this letter President Putin would overrun Crimea without causing any major bloodshed in less than 24 hours. The annexation/occupation of Crimea along with the future support for the Ukraine’s breakaway eastern regions would be the start of the diplomatic and economic war between the West and Russia.

American Perspective on Sanctions

Why did the U.S implement sanctions?

  1. Official Justification

March 6-20 2014 President Obama signed the following executive orders justifying the need for U.S sanctions:

  1. Executive Order 13660 that authorizes sanctions on individuals and entities responsible for violating the sovereignty and territorial integrity of Ukraine, or for stealing the assets of the Ukrainian people. These sanctions put in place restrictions on the travel of certain individuals and officials and showed our continued efforts to impose a cost on Russia and those responsible for the situation in Crimea.
  2. Executive Order 13661under the national emergency with respect to Ukraine that find that the actions and policies of the Russian government with respect to Ukraine -– including through the deployment of Russian military forces in the Crimea region of Ukraine –- undermine democratic processes and institutions in Ukraine; threaten its peace, security, stability, sovereignty, and territorial integrity; and contribute to the misappropriation of its assets.
  3. Executive Order, “Blocking Property of Additional Persons Contributing to the Situation in Ukraine” expanding the scope of the national emergency declared in Executive Order 13660 of March 6, 2014, and expanded by Executive Order 13661 of March 16, 2014, finding that the actions and policies of the Government of the Russian Federation, including its purported annexation of Crimea and its use of force in Ukraine, continue to undermine democratic processes and institutions in Ukraine; threaten its peace, security, stability, sovereignty, and territorial integrity; and contribute to the misappropriation of its assets, and thereby constitute an unusual and extraordinary threat to the national security and foreign policy of the United States.
  4. Trade Relationship

If we look at the U.S and Russian trade relationship published by The Office of the U.S. Trade Representative we notice that the U.S has nothing to really lose by placing the sanctions, as the U.S is not dependent on trade with Russia. One could surmise that the majority of this trade was a way for the U.S to try and develop a “warm” relationship with Russia following the fall of the Soviet Union.

Exports

  • Russia was the United States 28th largest goods export market in 2013.
  • S. goods exports to Russia in 2013 were $11.2 billion, up 4.3% ($465 million) from 2012.
  • S. exports of agricultural products to Russia totaled $1.2 billion in 2013.

Imports

  • Russia was the United States 18th largest supplier of goods imports in 2013.
  • S. goods imports from Russia totaled $27.0 billion in 2013, an 8.2% decrease ($2.4 billion) from 2012. U.S. imports from Russia accounted for 1.2% of total U.S. imports in 2013.
  • The five largest import categories in 2013 were: Mineral Fuel (oil) Iron and Steel, Inorganic Chemical (enriched uranium) Fertilizers and Precious Stones (platinum)
  • S. imports of agricultural products from Russia totaled $40 million in 2013.[7]
  1. World Politics

The United States as the world only superpower had an image to maintain. That image for the last 100 years has been the leader of democratic nations, defender of human rights, liberator of oppressed people and military superpower. The Russian intervention in the Ukraine changed this by reestablishing Russia as a power player in world politics, which the U.S has sought to prevent since the destruction of the Soviet Union.  President Obama could have seen this as an opportunity to check Russia who recently has been tied with various efforts to undermine the U.S in such areas as the elimination or depreciation of the U.S dollar as the world currency and vetoes on the Security Council. Additionally the sanctions provide President Obama a stronger position at the negation table when it comes to Russia in the future.

What have been the economic effects on the U.S

  1. According to the State Department website:

Utilizing these Executive Orders, the United States has steadily increased the diplomatic and financial costs of Russia’s aggressive actions towards Ukraine. We have designated a number of Russian and Ukrainian entities, including 14 defense companies and individuals in Putin’s inner circle, as well as imposed targeted sanctions limiting certain financing to six of Russia’s largest banks and four energy companies. We have also suspended credit finance that encourages exports to Russia and financing for economic development projects in Russia, and are now prohibiting the provision, exportation, or re-exportation of goods, services (not including financial services), or technology in support of exploration or production for deep-water, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory, and that involve five major Russian energy companies.[8]

  1. Us oil companies have lost millions

In 2014 Exxon after having invested $600 Million in a joint venture with Rosneft had just finished drilling in the Kara Sea.  According to an article published by Reuters “The Oil reserves in the Kara Sea could be as high as 13 billion tons, which is more than in the Gulf of Mexico or the whole of Saudi Arabia.”[9] The value of this discovery in September of 2015 would have been worth $43 trillion dollars.[10] According to William Engdahl a strategic risk consultant “Conveniently for Rosneft, ExxonMobil is forced out just after finishing the most complex and difficult part of the project.”[11] Perhaps it is no surprise then that ExxonMobil posted a $1 billion lose in its annual report in 2014[12] Having been slighted by President Obama in regards to the sanctions American energy companies retaliated by giving “83 percent of their cash to the party’s (republicans) Senate and House candidates for the 2014 elections which was 11 points higher than in 2010, the last election in the middle of a presidential term” according to data from the nonpartisan Center for Responsive Politics in Washington.[13]

  1. Lose of financial investments

Although the U.S is not one of top trading partners with Russia immediately following the sanctions the US economy is expected to lose $137 billion in trade, including $38 billion in exports, and up to $30 billion in US capital tied up in Russia. [14] This may seem high but the U.S has more money tied up with Italy and Switzerland than it does with Russia. Additionally the banking sector in the U.S took a hit as both Visa and MasterCard had 170,000 customers within the Russian Federation that were affected by the sanctions. These customers understood that it was the U.S and not Russia who commenced the sanctions have left American companies in favor of Chinese providers. According to Scott Semet who is an expert on Russian financial markets “In the longer term, damage to the initiator can be much greater, and in this case erodes US credit card dominance. Western readiness to sanction credit cards no doubt served as a wakeup call to China and others, and will lead them to redouble their efforts,”[15]

Possible outcomes for the U.S

By sanctioning specific sections of Russia economy and banking sector the U.S could reduce the amount of money that Russia can use for upgrading its military. This is especially important as the battle for the ownership of the artic and its future oil/gas reserves heats up. The Russians have recently changed their military strategy to focus more on its northern borders including the creation of new bases to help strengthen its presence in the region. The sanctions have slowed down the modernization of fifth generation tanks and planes that Russia could buy with the decline in the Russian economy the Russian government has lowered the amount of each weapon system that they will be ordering in the future and there limit the amount that could be used against the U.S.

Since the U.S has nothing to lose with a continuation of the sanctions they can use them to perhaps convince Russia to cooperate because Russia is still tied to the American financial sector and as seen with Iran the U.S can use this to paralyze a nation. There are numerous areas that the U.S could use Russian cooperation such as checking the control and expansion of China, security in Afghanistan, the civil war in Syria, the influence of BRICS, a possible resolution in the security council and the eventual pull of Russian support from separatist forces in eastern Ukraine.

The United States has always feared any trade agreement that would bring Europe and Russia closer together. According to Dr. Goran:

 “If this would happen the U.S would lose its hegemony because as of right now the E.U is the junior partner… Europe is paying for the sanctions just as much as the Russians but who is benefiting, the United States. Because their position is stronger with sanctions than without sanctions. And now with the free trade agreement the U.S is about to avoid that Europe in the medium term of 5-10 years would find an agreement with a free trade area between Lisbon and Moscow.”[16]

Agreeing with Dr. Goran in this regard, the U.S wants to maintain its seniority in world affairs and economics and a Euro-Russian trade deal would change the dynamics of the world in the favor of Europe. Additionally with Russian exports of oil and gas limited, it presents an opportunity for the United States to start exporting its new booming industry of shale oil and gas to Europe.

This movement towards American gas and oil already started with Lithuania. They signed agreements with Delfin LNG and Cheniere Energy both are American Liquid Natural Gas Company. The former Lithuanian ambassador Zygimantas Pavilionis   boasted “We signed a memorandum of understanding with Louisiana to buy LNG for them back in 2010, says, the former ambassador to the U.S. “We had breakfast. He is not a fan of Putin, let me tell you. “We were one of the first countries to lobby the Hill to allow for LNG exports. Our long-term contract with Gazprom ends next year. The U.S. should use its energy muscle. This way Russia cannot use their energy leverage on us anymore.”[17]

With the TTIP the United States would cement itself as Europe’s number one trading partner and drive an economic wedge between Europe and Russia that it many never be able to break in the future. This view is not shared by all Political Scientists, when asked if he believed the U.S is using the TTIP to drive a wedge between Europe and Russia Dr. Hug of The University of Geneva said “I think that there have been a lot of coincidences and that the trade agreement was being talked about long before the events of Crimea occurred. I think if the U.S tried at one point or another to drive a wedge between Russia and the E.U that this was much earlier.”[18]

E.U Perspective on Sanctions

Why did the E.U implement sanctions?

  1. On March 3rd 2014 the Council of the European Union stated that:

It (the E.U) condemned the clear violation of Ukrainian sovereignty and territorial integrity by acts of aggression by the Russian armed forces as well as the authorization given by the Federation Council of Russia on 1 March for the use of the armed forces on the territory of Ukraine. The EU called on Russia to immediately withdraw its armed forces to the areas of their permanent stationing, in accordance with the Agreement on the Status and Conditions of the Black Sea Fleet stationing on the territory of Ukraine of 1997.[19]

  1. Disruption of peace

The E.U has gone to great lengths previously to maintain peace in continental Europe and has in previous incidents such as the insurgency in Macedonia and the unrest in Kosovo intervened. Europe even created an organization explicitly for maintaining peace on the continent; The Organization for Security and Co-operation in Europe has a comprehensive approach to security that encompasses politico-military, economic and environmental, and human aspects.[20] With the Russian incursion into the Ukraine, their continued support of the Ukrainian rebels Europe feels that Russia has brought war to the European continent but not just any type of war but a war of ethnic relations. According to a report by the European commission:

“Russian is the most widely spoken foreign language in Estonia, Latvia and Lithuania, and also commonly known in other Central and Eastern European countries. This has lifted Russian to the fourth place ex aequo in the list of most widely spoken foreign languages in the EU.”[21]

This is a very serious problem for Europe because as stated by the E.U commission Russian is the fourth most spoken language in the E.U and Russia used the Russian language as a new type of information war in order to win over the Ukrainian population before annexing Crimea and using propaganda to create misinformation within Ukraine.  This fear also creates the belief that Russia will start trying to extend its reach into previous zones of influence from the Soviet era relying on Russian speakers to create unrest within Europe or use them as justification for interventions in heavily populated Russian-speaking countries such as the Baltic nations.

What have been the economic/diplomatic effects on the E.U and Russia

1.Diplomatic effects

  1. The EU-Russia summit was cancelledand EU member states decided not to hold regular bilateral summits. Bilateral talks with Russia on visa matters as well as on the New Agreement between the EU and Russia were suspended.
  2. Instead of the G8 summit in Sochi, a G7 meetingwas held in Brussels on 4/5 June. EU countries also supported the suspension of negotiations over Russia’s joining the OECD and the International Energy Agency.
  3. 149 persons and 37 entitiesare subject to an asset freeze and a travel ban over their responsibility for actions, which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine. This includes 6 persons with close links to the Russian president. On 14 September 2015 the Council prolonged these measures until 15 March 2016.
  4. In March 2014, the Council decided to freeze the assets of individuals identified as responsible for the misappropriation of Ukrainian state funds. These measures were extended in March and June 2015. [22]

2.Economic Sanctions

Starting July 2014 the E.U has used smart sanctions against specific sectors and personal of the the Russian Federation. In March 2015, E.U leaders voted to make the sanctions directly related to Minsk agreements, which is a cease-fire agreement between the Ukrainian government and the Eastern Separatists and the full implementation of these agreements. In June 2015, the E.U leaders decided to extend the sanctions until the January 31st 2016. Below is the list as stated on the E.U website:

  1. EU nationals and companies may no longer buy or sell new bonds, equity or similar financial instruments with a maturity exceeding 30 days, issued by:
    1. Five major state-owned Russian banks, their subsidiaries outside the EU and those acting on their behalf or under their control.
    2. Three major Russia energy companies and
    3. Three major Russian defense companies.
  2. Services related to the issuing of such financial instruments, e.g. brokering, are also prohibited.
  3. EU nationals and companies may not provide loans to five major Russian state-owned banks.
  4. Embargo on the import and export of arms and related material from/to Russia, covering all items on the EU common military list.
  5. Prohibition on exports of dual use goods and technology for military use in Russia or to Russian military end-users, including all items in the EU list of dual use goods. Export of dual use goods to nine mixed defense companies is also banned.
  6. Exports of certain energy-related equipment and technology to Russia are subject to prior authorization by competent authorities of Member States. Export licenses will be denied if products are destined for deep-water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia.
  7. Services necessary for deep water oil exploration and production, arctic oil exploration or production and shale oil projects in Russia may not be supplied, for instance drilling, well testing or logging services. [23]

2.1 Professional Analysis

All of these restrictions and sanctions against Russia create a large problem for the E.U because Russia is the third largest trading partner of the EU. Their trade relationship was based off a relationship of mutualism. Machinery and transport equipment, chemicals, medicine and agricultural products dominate EU exports to Russia because Russia is not able to compete with the combined capital and manufacturing capabilities of Europe.

EU imports from Russia are dominated by raw materials, in particular, oil (crude and refined) and gas.[24] This is because Europe is dependent on Russia for the majority of its energy needs and that the two blocs need each other according to three professors in Geneva:

  1. Goran-Russia has what Europe needs and Europe has what Russia needs. Europe has very harsh winters and needs Russian gas because they do not have an alternative because European gas producers are declining and the Middle East and North Africa are very far away. So the most beneficial way for Europe to receive gas is through Russia. In the future Europe could receive oil and gas from Azerbaijan and other “Stan” countries[25]
  2. Biersteker-Yes I do I think it’s likely just because of geography and its location in Europe and that basically Russia has become a resource exporting country and therefor heavily dependent on imports from elsewhere so that part of the trade relationship is likely to continue as Russia continues to produce in bulk commodities that Europe lacks and that there is already infrastructure in place particularly in the oil and gas sector .Yes there currently is a rupture in the relationship but there is some uncertainty but in the long term even though Russia has I think made some politically motivated gestures towards Asia and shifting eventually in most people in business would say this is an aberration and we will get back to integration because in the last 25 years what used to be two blocks completely or largely separated to 2 areas that are so closely interdependent that ultimately unless there was a huge rupture and much more military conflict than of course that would change it but for the foreseeable future I think they are closely interrelated  and are likely to remain that way.[26]
  3. Hug-Europe is certainly trying to diversify their sources where they get their oil and gas but the issue is that there is quite a lot of demand that is met through Russia and this will be hard to change. My hunch is as long as gas and oil are part of the energy mix that Western Europe is using that Russia will not be a completely neglect able player on this continent[27]

3.Restrictive measures in response to the illegal annexation of Crimea and Sevastopol

As a consequence of the EU’s non-recognition of the illegal annexation of Crimea and Sevastopol by Russia, the Council imposed substantial restrictions on economic relations with Crimea and Sevastopol until June 23rd 2016.

  1. In addition, a full ban on investmenthas been in place since December 2014, along with a prohibition to supply tourism services in Crimea.[28]  In addition, EU operators will no more be permitted to offer tourism services in Crimea or Sevastopol. In particular, European cruise ships may no more call at ports in the Crimean peninsula, except in case of emergency. This applies to all ships owned or controlled by a European or flying the flag of a member state. Existing cruise contracts may be still be honored until 20 March.[29]
  2. The EU has adopted a prohibition on imports originating from Crimea and Sevastopol unless accompanied by a certificate of origin from the Ukrainian authorities.
  3. Europeans and EU-based companies may no more buy real estate or entities in Crimea, finance Crimean companies or supply related services.
  4. It has also been prohibited to export certain goods and technology to Crimean companies or for use in Crimea. These concern the transport, telecommunications and energy sectors or the prospection, exploration and production of oil, gas and mineral resources. Technical assistance, brokering, construction or engineering services related to infrastructure in the same sectors must not be provided.

Possible outcomes for the E.U

The E.U surprised Russia by remaining united when it came to the creation of sanctions. According to a report done by PISM:

Russia at first tried to “to make the adoption of sanctions more complicated, Moscow pursued several tracks ahead of the EU institutions’ meetings regarding the adoption of prohibitive measures against Russia, the Kremlin made overtures to European capitals for a diplomatic solution, only to renege on this several days later. Russia alternated apparent de-escalation of violence with unexpected scaling up of hostilities in Ukraine. This tactic worked until August 2014, when the EU substantially strengthened sanctions, followed by new restrictions in September 2014. In an attempt to prevent further restrictive measures and raise the costs for countries that imposed sanctions on Russia, the Kremlin introduced a food import ban. As Russia is second biggest destination for the EU’s agriculture exports (10% of the total), the ban specifically targeted the EU in the hope of sowing discontent among farmers and challenging European governments from the inside. Russia further extended the import ban in October 2014.

Although for now the E.U has remained united in its decision to keep sanctions going tensions are beginning to show. Russia has offered some of the countries that were dependent on trade with Russia the ability to have them removed from the Russian sanction list. However this unity is beginning to crack as German Foreign minister Walter Steinmeier recently spoke in Lithuania “It might be that there are some attempts like this and there will be in future. There were such attempts and they were not successful…our decision was taken, so I think the attempt to split Europe will fail.”[30] I personally believe that this will not be something that most Europeans countries will want to continue with. As demonstrated by the riots in France this summer by French farmers the lose of the Russian market is to much for some industries to handle as they must now compete against other E.U members instead sharing the Russian market.

If we use the division of the E.U on the immigration crisis we can see that Europe is not united on every front and that since it is not a federal system it means that states are free to make their own foreign policy decisions that best suit them. An example is that of Hungary who recently sealed all of its borders with other Balkan countries to prevent the flow of immigrants into its territory despite strong opposition by Germany and many other European countries. It would not be to far of a stretch for a President or Prime Minister to say that enough is enough with the sanctions and want a favorable relationship with Russia, and once one country makes this move it is very likely that many others will follow suit. This domino effect could spell the end of the E.U, as we know it.

Russian Perspective on Sanctions

According to Dr. Goran this whole incident can be explained by historical pretext.

“Russians have a complex of Afghanistan and the destruction of the Soviet Union. So they view the expansion of NATO and the E.U as a plan to dismantle the Russian federation. So Putin is drawing the red line at which you are not allowed to interfere otherwise we will act proactively. The Crimean case is like this because for 300 years they had an overlapping identity and were the same. But following the first and second world wars western Ukrainians were mostly poles that immigrated in the Ukraine. I would say that that in the 19th century there was a G8 composed of the great powers and that between 1814 and 1914 would meet for 35 times but every time they would have a crisis, They used to follow this method and now Russia is as well: if one country receives an advantage the other country would be allowed to do the same. Apply the concept to Russia that Ukraine is our zone of influence and if Ukraine in Kiev becomes a pro-western government that we (Russia) should have what was given by us to the Ukrainians which was Crimea so I would see this as a 19th concept of Europe into 21st concept with Russia that Russia says yes you take the Ukraine but we take back what is ours (Crimea)”[31]

What led Russia to implement sanctions

  1. Russia started its sanctions on Western food products because of the sanctions placed on Russia by the E.U and will remain in place as long as the sanctions by Europe remain in place.

The President’s Edict No. 560 dated August 6, 2014 documented the ban and the Government’s Decree No. 778 dated August 7, 2014. The Decree specifies types of banned products, which include: meat and poultry, fish and seafood, milk and milk products (including cheese), vegetables, fruits, nuts as well as some other foods and ready-made meals. The restrictive measures do not include wine and spirits, cereals, pasta, olive oil, baby food and beverages. The ban is imposed for the duration of one year, but can be revisited earlier, if appropriate.

When asked if Russia targeted the agricultural sector specifically Dr. Hug said “That is normally the strategy in the sanctions game that you try and retaliate by targeting sectors that can easily be demobilized and so that seems like a good strategy from the Russian perspective.[32] “According to the international law office of Nortonrose Fullbright “It is expected that the EU will be the region which is most affected by the targeted restrictions as 73 per cent of the banned imports come from the EU…The estimated value of exports affected by the ban in the EU is €5.1 billion or 45% of the total. Some food sectors will be affected more by the measures than others, most notably the dairy and fisheries sectors. Last year, these exports to Russia were worth €2.3 billion and €199 million respectively.[33]

What have been the economic effects on Russia

1.Foodstuffs

One of the side effects of declaring the sanctions against Western foodstuffs is the increase in the price of food. The average cost of food in Russia rose 20% with some the more important food sources rising as much as 60%, this coupled with inflation and the decrease in the value of the rouble have made some food items out of reach of some of the poorer Russian citizens. Although some countries have taken advantage of this power void, fruit and vegetable imports from European countries outside the European Union, such as Serbia and Macedonia, indeed grew by between 35 and 200 percent over the past year.[34] Discussing his recent trip to Russia Dr. Goran gave his personal experience on the situation in Moscow:

 “I just visited Russia in the summer and all the stores are full of food. In 2014 the exchange rate was 35 rubles for 1 us dollar in 2015 it was 70 so you have inflation.” When asked if he felt that life is harder for Russians he responded “no because the Russians paid off all of their debts a few years ago, 2nd they have a huge foreign reserve so they are using this to pay for their retirees and public officers, 3rd I talked to many retired Russians in Moscow and they were very happy with the lifestyle that they have and they don’t see any issues”[35]

Though there has been recent upheaval with 285,000 people signing an online petition about the destruction of the food. Some famous individuals in Russia have spoken against the destruction: Russian lawmaker Andrei Krutov proposed to donate all the confiscated food to the war-torn separatist regions in eastern Ukraine, Prime Minister Mikhail Kasyanov sarcastically said “some real triumph of humanism,” Pro-Kremlin TV anchor Vladimir Solovyov said “I don’t understand how food can be destroyed… In a country that lived through the horrible hunger during the war and tough years that followed.” and even the Russian clergy joined in as a Russian Orthodox priest and Putin backer wrote on a religious website: “My grandmother always told me that throwing away food is a sin. This idea is insane, stupid and vile”.[36]

  1. Loss of trading partner

Steven Pifer, a Senior Fellow at the Brookings Institute and former U.S. Ambassador to Ukraine believes:

 “The impact of the sanctions, I think, is cumulative… The longer Russia goes without changing its policy, the longer the sanctions stay in place, and the more damage it does to the Russian economy. I believe that at some point… the Russians may find that damage is becoming too painful.”[37]

As the EU is the first trading partner of Russia and before the events in the Ukraine the EU was the most important investor in Russia it is important that they reconnect with Europe. It is estimated that up to 75% of Foreign Direct Investment stocks in Russia came from EU member states (including Cyprus).[38] Russian Prime Minister Dmitry Medvedev estimated that the sanctions cost Russia $26.7 billion last year, and projected that losses could rise to $80 billion in 2015.[39] Additionally Russia was dependent on trade with Europe for very specific needs when it comes to the advancement of its military. The E.U sanctions related to dual-use technologies which deal with hardware and high-performance electronics or quantum cryptography was estimated at about €20 billion per year and without this equipment Russia is unable to upgrade its equipment with a perfect example being Russia’s SU-30 fighters feature French-installed electronics, without which Russia will not be able to fulfill this contract. The same story can happen with tanks, which Russia will be unable to export to Asian partners without French thermo graphic cameras.[40]

Possible outcomes for Russia

Regardless of the financial pressures that mount Putin will not back down. He has built his reputation in Russia and the world* as a leader who may bend but never will break and bring the shame that was associated with the fall of the Soviet Empire. In fact one can trace Putin’s future foreign policy to a 2005 address to the nation where he said:

“Above all, we should acknowledge that the collapse of the Soviet Union was a major geopolitical disaster of the century. As for the Russian nation, it became a genuine drama. Tens of millions of our co-citizens and co-patriots found themselves outside Russian territory. Moreover, the epidemic of disintegration infected Russia itself.”

This along with his belief that as the President of Russia it is his responsibility to protect these Russian speakers as they are former Russians who ended up outside of the geographical borders of modern Russia. Various professionals in the field of Political Science share this view of Putin not backing down and standing against the sanctions.

Brooking Institute’s Clifford Gaddy, an economist specializing in Russia believes that:

Russia’s president, along with the majority of its citizens, sees the West’s actions as form of “economic war.” In Putin’s eyes, he has little choice between leaving his country vulnerable to the existential threat of Ukraine (as it grows closer to the West) or enduring additional months of financial hardship. Conversely, sanctions may even act as a “punching bag” in Putin’s anti-West political narrative, as many Russians now fault America and the EU for the current economic slump.[41]

Simon Hoellerbauer a research assistant intern with the Foreign Policy Research Institute’s Project on Democratic Transitions wrote:

“Another problem with the sanctions is that they are an attempt to force Putin to assume a position he cannot accept: that of Russia as a secondary nation. Although his speech in March 2014 in which he defended Russia’s involvement in Crimea was mainly a public relations stunt designed to justify Russia’s actions, it demonstrated a worldview that is incompatible with the West. Through a flawed interpretation of history, Putin sincerely believes that Russia, after feasting at the main banquet, has been asked back to the children’s table.”

This is true, for Putin and the people of Russia finally feel as though their time in the shadows of world affairs is over and that they must beat the west in this geopolitical battle if they want to remain “at the main table”

Putin will be able to survive this or mitigate the cost to him of sanctions through a number of ways. In regards to being cut off from European dual use technology Putin has a few options at his disposal. He can seek Asian partners to manufacture these same components by providing working models and letting a country such as China generate the necessary electronic equipment. He could also work with the Chinese and steal the technology that is required through use of hackers. It is well known within the American defense industry that the Chinese steal American technology and trade secrets in order to create their own equipment. Its possible he could pay for these services with oil and gas, which the Chinese are always in need of.

The second also relates to the Chinese in which Russia begins its own “Asian Pivot”.  After almost 10 years of negotiations, Gazprom and CNPC signed a 30-year contract on gas deliveries to China, pledging 38 billion cubic meters annually, worth $400 billion. From the Kremlin’s point of view, the contract should signal to the EU the prospects of reorientation of gas exports from Europe to Asia. However, the average price of gas exported to China will be less than what the Russia’s European customers pay.[42] This is considered to have been a deal that favored the Chinese and was only finished so quickly because of Russia’s need for money in the energy sector. It can also begin a much larger trade cooperation agreement with China, which can be mutually beneficial to the two countries that have previously had an uneasy relationship because of border disputes and other diplomatic situations.

Russia could also attempt to help Europe with its “European” problems and by doing so seek concessions in regards to the sanctions and the acceptance of Crimea in the Russian Federation. Russia could pull all support for the rebels including weapons, equipment, intelligence and public support. By doing so the government in Kiev could begin to try and rebuild the country while moving towards the E.U as long as it does not seek a membership with NATO. Russia current involvement in Syria if it proves fruitful solves the immigration crisis in Europe and the Middle East while at the same time giving Russia a seat at the negotiating table when it comes to a replacement leader to President Assad. This could be appealing to E.U because the currently the immigration crisis in Europe is such a problem that various Prime Ministers and Presidents have threatened to allow immigrants to simply pass through their countries as long as they don’t register in their country while others have threatened to reinstitute border checkpoint which goes against the Dublin Accords. Europeans might view concessions to Russia as the lessor of two evils if they solve the immigration crisis and wont face Russian opposition when it comes to the election of a new leader of Syria.

There are two problems that exist that could spell the end of Putin regime. The first is the depletion of its emergency reserve fund in 18 months.  In April 2015 when addressing a group of students in St. Petersburg Finance Minister Anton Siluanov said “This year we will use up to 3 trillion rubles [$59 billion] of the Reserve Fund’s 5 trillion [$98 billion], that is, we could basically use it up in a year and a half if we don’t approach our budget policy responsibly.”[43] If Russia was about to run out of money it would need to seek loans from nations that don’t currently have sanctions against it. This loans would come with sky high interest rates which Russia would have pay for with various natural resources because it would not have any other collateral. The Russians would have to accept whatever interest rate they were given because failing to do so would cause the value of the Ruble depreciate and cause a run on the national banks.

This could lead to Putin’s greatest fear, a color revolution within Russia. Putin has witnessed the power of a popular peoples movement against governments in the Middle East, Africa and in the Ukraine. In the last two years he has said:

“In the modern world extremism is being used as a geopolitical instrument and for remaking spheres of influence. We see what tragic consequences the wave of so-called color revolutions led to…”For us this is a lesson and a warning. We should do everything necessary so that nothing similar ever happens in Russia.” He also discussed the use of the Internet by saying “Extremist ideology is gaining momentum in the virtual sphere. Through which extremist organizations are trying to recruit followers” and that because of this the Internet is to blame and must somehow be regulated or monitored.[44]

            In June of 2015 he mobilized the military to prepare for such an event. Russian Defense Minister Sergey Shoigu in an address to reporters said:

“Some people say that the military should not be involved in political processes, some say the direct opposite. We will order a study on the phenomenon of color revolutions and the military’s role in their prevention…we have no right to allow the repetitions of the collapses of 1991 and 1993,” he said. “How to do it is another story, but it is clear that we must deal with the situation. We must understand how to prevent this and how to teach the younger generation so that it supported the calm and gradual development of our country.”[45]

Along with this various laws and bills have been drafted or already put in place that would prevent or mitigate the abilities of large groups of protesters to demonstrate thereby enabling Putin to legally justify breaking up demonstrations.

Conclusion

It is clear that going into the future that President Putin has prepared for and secured his own “fortress” within Russia with misinformation and propaganda that will allow him to weather any siege from the west. This paper has shown through the three different perspectives how each country began sanctions, the effects of doing so and finally what the possibilities for the future are. No matter the pressure that Putin faces, he will not bow to the west and will wait the sanctions out possibly damaging the E.U political and economic environment. Further research will be required in the following decade as we are able to see how this changed the geopolitical and geoeconomical world by means of declassified documents and looking at which bloc gave into the demands of the other first. Russia is now a contender in world politics and wants the world to know it and respect it. As long as Putin is able to maintain his popularity at home there is no reason to assume that he would not try such a move in a different country as he has just done in Syria. The west has a choice, go for the jugular or try and reestablish more friendly ties with Russia.

Acknowledgements: 

I would like to thank the following individuals for donating their time for this article:

  • Professor Jovanovic Goran (International University of Geneva)
  • Professor Simon Hug (The University of Geneva)
  • Professor Thomas Biersteker (The Graduate Institute in Geneva)

Footnotes:

[1] Goran, Jovanovic. “Economic Warfare.” Interview by author. September , 2015.

[2] Hug, Simon. “Economic Warfare.” Interview by author. September , 2015.

[3] “European External Action Service.” European Union. Accessed September 22, 2015.

[4] “VADEMECUM ON FINANCING IN THE FRAME OF THE EASTERN PARTNERSHIP.” EUROPEAN COMMISSION EUROPEAN EXTERNAL ACTION SERVICE, 2010, 3-7.

[5]MARSON, JAMES. “Russia Bails Out Ukraine In Rebuke to U.S., Europe.” Wall Street Jounral. December 17, 2013. Accessed September 29, 2015.

[6] “Ousted Ukrainian President Asked For Russian Troops, Envoy Says – NBC News.” NBC News. March 3, 2014. Accessed October 13, 2015.

[7] “President Obama’s Signature Paves Way for Permanent Normal Trade Relations with Russia and Moldova | United States Trade Representative.” United States Trade Representative. May 4, 2015. Accessed October 14, 2015.

[8] “Ukraine and Russia Sanctions.” U.S. Department of State. April 3, 2014. Accessed October 13, 2015.

[9] “ExxonMobil Admits $1bn Lost from Anti-Russia Sanctions.” RT. February 27, 2015. Accessed October 7, 2015.

[10] KRISHNAN SIMHA, RAKESH. “Why Sanctions Are Stupid and Spell the End of Western Influence.” Russia and India Report. September 29, 2015. Accessed October 7, 2015.

[11] KRISHNAN SIMHA, RAKESH. “Why Sanctions Are Stupid and Spell the End of Western Influence.” Russia and India Report. September 29, 2015. Accessed October 7, 2015.

[12] “ExxonMobil Admits $1bn Lost from Anti-Russia Sanctions.” RT. February 27, 2015. Accessed October 7, 2015.

[13] Litvan, Laura. “Energy Industry Placing Big Bets on Republican Senate Win.” Bloomberg.com. June 5, 2014. Accessed October 22, 2015.

[14] KRISHNAN SIMHA, RAKESH. “Why Sanctions Are Stupid and Spell the End of Western Influence.” Russia and India Report. September 29, 2015. Accessed October 7, 2015.

[15] KRISHNAN SIMHA, RAKESH. “Why Sanctions Are Stupid and Spell the End of Western Influence.” Russia and India Report. September 29, 2015. Accessed October 7, 2015.

[16] Goran, Jovanovic. “Economic Warfare.” Interview by author. September , 2015.

[17] Rapoza, Kenneth. “How Lithuania Is Kicking Russia To The Curb.” Forbes. October 15, 2015. Accessed October 7, 2015.

[18] Hug, Simon. “Economic Warfare.” Interview by author. September , 2015.

[19] “EU Sanctions against Russia over Ukraine Crisis.” EUROPA. October 21, 2015. Accessed October 22, 2015.

[20] “What Is the OSCE?” Organization for Security and Co-operation in Europe. 2015.

[21] “EUROPEANS AND LANGUAGES.” Eurobarometer 63.4 (2005): 5.

[22] “EU Restrictive Measures in Response to the Crisis in Ukraine.” Http://www.consilium.europa.eu/. October 18, 2015. Accessed October 14, 2015.

[23] “EU Sanctions against Russia over Ukraine Crisis.” EUROPA. October 21, 2015. Accessed October 22, 2015.

[24] “Russia.” Countries and Regions. April 22, 2015. Accessed September 16, 2015.

[25]  Goran, Jovanovic. “Economic Warfare.” Interview by author. September , 2015.

[26]  Biersteker, Thomas. “Economic Warfare.” Interview by author. September , 2015.

[27]  Hug, Simon. “Economic Warfare.” Interview by author. September , 2015.

[28] “EU Restrictive Measures in Response to the Crisis in Ukraine.” Http://www.consilium.europa.eu/. October 18, 2015. Accessed October 14, 2015.

[29] “EU Sanctions against Russia over Ukraine Crisis.” EUROPA. October 22, 2015. Accessed October 23, 2015.

[30] Brown, Stephen. “Russia Cannot Divide Europe over Ukraine, Says German Minister.” Reuters. April 16, 2015. Accessed October 23, 2015.

[31] Goran, Jovanovic. “Economic Warfare.” Interview by author. September , 2015.

[32] Hug, Simon. “Economic Warfare.” Interview by author. September , 2015.

[33] Panov, Andrey, David Harris, Saskia Blokland, Joke Everts, Michael Jürgen Werner, Patricia Nacimiento, and Ruth Cowley. “The Impact of the Russian Sanctions on Food and Agribusiness.” Nortonrosefulbright.com. December 1, 2014. Accessed October 22, 2015.

[34] “Russia Is Destroying Its Food.” Stratfor. August 11, 2015. Accessed September 14, 2015.

[35] Goran, Jovanovic. “Economic Warfare.” Interview by author. September , 2015.

[36] “Russia Is Destroying Its Food.” Stratfor. August 11, 2015. Accessed September 14, 2015.

[37] Dajani, Katya. “One Year Later: Russia, Sanctions, and the G7 | World Policy Institute.” World Policy Institute. June 16, 2015. Accessed October 22, 2015.

[38] “Russia.” Europa. April 22, 2015. Accessed October 23, 2015.

[39] Dajani, Katya. “One Year Later: Russia, Sanctions, and the G7 | World Policy Institute.” World Policy Institute. June 16, 2015. Accessed October 22, 2015.

[40] Ćwiek-Karpowicz, Jarosław, and Stanislav Secrieru. “Sanctions And Russia.” Polski Instytut Spraw Międzynarodowych 1, no. 1 (2015): 89.

* Was voted as the most powerful man in the world multiple times by various magazines

[41] Dajani, Katya. “One Year Later: Russia, Sanctions, and the G7 | World Policy Institute.” World Policy Institute. June 16, 2015. Accessed October 22, 2015.

[42] Ćwiek-Karpowicz, Jarosław, and Stanislav Secrieru. “Sanctions And Russia.” Polski Instytut Spraw Międzynarodowych 1, no. 1 (2015): 102.

[43] “Russia’s Rainy-Day Reserve Fund Could Run Out in a Year and a Half – Finance Minister | Business.” The Moscow Times. April 24, 2015. Accessed October 12, 2015.

[44] KORSUNSKAYA, DARYA. “Putin Says Russia Must Prevent ‘color Revolution'” Reuters. November 20, 2014. Accessed October 23, 2015.

[45] “Russian Military to Order Major Research to Counter ‘color Revolutions'” RT. June 19, 2015. Accessed October 23, 2015.

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