US sanctionsRussian defiance

Moscow can handle US sanctions. How far will Washington go?

Washington imposes sanctions on Moscow over the Skripals affair and talks of more. But a stalemate looks likelier than an all-out economic war

September 3, 2018 12:32 PM (UTC+8)
Vladimir Putin's approval ratings have fallen over unpopular changes to the old-age pension. Photo: Flickr.

 More US sanctions are raining down upon Russia. The latest sanctions, which took effect last week, relate to the poisoning of former spy Sergei Skripal, but are only the latest in a long series of measures adopted by the US to punish Vladimir Putin’s Russia for its “malignant activities” around the globe.

That list extends well beyond the Skripals to include the annexation of Crimea and interference in US elections.

But, despite being the central weapon in the neo-Cold War confrontation against Russia, sanctions have not forced Moscow to make any major concession so far. And given the resilience of the Russian economy and the dependence of Western European countries on Putin’s oil and gas supplies, they are unlikely to do so in the foreseeable future.

Moscow in ‘defiance mode’

The sanctions package just introduced by the Donald Trump administration will deny the country US credit, halt financial assistance and prohibit the export of security-sensitive goods, technologies and arms.

These measures have been taken to punish Moscow for the alleged attempted murder of Russian double agent Sergei Skripal who, together with his daughter Yulia, were hospitalized after suffering exposure to a Russian-style nerve-agent in Salisbury last March.

Britain has strongly alleged – albeit, without offering any actual evidence – that the Russian state was behind the attempted assassinations. As per its usual playbook, Moscow reacted to the new sanctions with defiance.

It has rejected the accusations and defined the US measures as “illegal.” The ever-combative spokesperson of the Russian Foreign Ministry, Maria Zakharova, once again pointed out the lack of evidence supporting US allegations, defining the Skripal case as “a pretext” used by the Trump administration to inflict new sanctions on Russia.

Kremlin spokesperson Dmitry Peskov said the Russian government was evaluating the possible consequences of the new sanctions, assuring the public that countermeasures “that best correspond to Russia’s interest” will be taken.

Having been accused of breaching the 1991 Chemical and Biological Weapons Control and Warfare Elimination Act, Moscow should prove it will not use chemical weapons in the future by allowing international observers to carry out inspections of Russian soil, according to the US.

If Moscow refuses to comply, a second, harsher set of sanctions will follow in November. They are to include sweeping bans on trade, cuts in diplomatic relations and a prohibition against Russian carriers such as Aeroflot from landing on US territory.

It is highly unlikely that Moscow will comply with the US demands, which Russia’s Foreign Ministry has already defined as “unacceptable.”

“Using the language of ultimatums with Russia is futile”, Zakharova thundered. “Everyone is well aware that last year Russia fully eliminated its stock of chemical weapons” in strict compliance with related conventions, she said.

Economic impact

So, how hard are the new sanctions likely to impact the Russian economy?

According to rating agency Moody’s, given the relatively low dependence of Russia on US imports – only 5.5% of Russia’s imports come from the US – this round of sanctions is unlikely to cause significant woe.

Moreover, the adopted sanctions came into force with significant waivers concerning US national security. The waivers affect such areas as civil aviation, governmental space cooperation and transactions with Russia’s state enterprises.

Due to these issues, it is sanctions’ side effects, rather than sanctions per se, that are causing the damage. Because of the instability hovering over the Russian market, direct foreign investments decreased by more than 50% in the first half of 2018 compared with the previous year.

As soon as new sanctions were announced earlier this month, the ruble  touched its lowest point since 2016 and the Russian stock exchange plummeted.

“Financial sanctions pose the most serious danger for the Russian market and investors’ mood,” said Yelena Kozhukhova, an analyst at Veles Brokerage. “If they are imposed, stock markets and the ruble will be hit again.”

Economist Oleg Buklemishev told Novaya Gazeta that the climate of instability generated by sanctions is “the perfect recipe for economic stagnation,” as investors fear to invest due to upcoming measures.

These fears are not unfounded, considering that further bills are being reviewed by the US Congress.

With midterm elections on the horizon, Washington wants to increase pressure on Moscow to deter any possible interference. National Security Adviser John Bolton has already warned Moscow not to interfere, adding that the US is preparing “all necessary steps to prevent it from happening.”

Among those steps, a new bipartisan bill, the “Defending American Security from Kremlin Aggression” act, was introduced at the beginning of August.

If approved, the so-called “Bill from Hell” would impose sanctions which are deemed to be “the most hard-hitting ever imposed.” They include bans on Russian state banks operating in the US, as well as preventing US investments in Russian governmental or affiliated energy companies.

Stalemate likeliest outcome

According to Russian Prime Minister Dmitry Medvedev, the Congressional measures, if enforced, would be considered “a declaration of economic war” to which Russia should respond “economically, politically – or if needed, by other means.”

To pre-empt increasing economic isolation, Russia has already undertaken preventive measures.

The Russian Central Bank got rid of most US Treasury bonds and has significantly beefed up its gold reserves to reduce dependence on the US dollar. A recently introduced pension reform and a new value-added tax expected to take effect next year will secure significant additional budget revenues and strengthen Russia’s ability to withstand US sanctions.

However, this financial barricade will likely come at a cost: declines in President Putin’s domestic popularity.

Given Russia’s sanctions resistance and its preventative moves, only extreme measures, such as sanctioning Russian foreign debt or hitting Russian oil and gas exports, could seriously shake the Russian economy. However, it is unlikely that the US would ever adopt such stringent measures out of fear of the collateral economic damage.

Russia is the largest exporter of natural gas in the world, with buyers including many of Washington’s leading European allies. Excluding it from markets could trigger a global energy crisis. And sanctioning all $486 billion of Russia’s foreign debt would also cause deep losses to investors – many of them based in the US.

So, no solution is in sight. Russian unwillingness to re-calibrate its foreign policies, combined with American unwillingness to launch an all-out economic war, means this classic-looking stand-off is unlikely to be solved anytime soon.

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