By R. Bailey Scott
Assistant Online Editor
Today, the nature of U.S.-Russian relations is recognized as precarious by both policymakers and business leaders. What are the political and financial consequences of America’s current sanctions on Russia? Who will gain from this policy? And, more importantly, who will lose?
Washington and Wall Street are trying to gage the fate of US-Russian political and economic relations in the coming years, anticipating everything from Cold War retrenchment to twenty-first century détente. And the current economic downturn seems to just be the beginning. Deputy economy minister Alexei Vedev forecasts that Russia’s GDP will continue to fall by 0.8 percent.[i] According to Barclays’ CEO for Russia, the costs of these sanctions have percolated into Russian companies outside of the targeted enterprises.[ii]
In President Barack Obama’s recent State of the Union address to American citizens, he reiterated his administration’s firm stance on Russia: “We’re upholding the principle that bigger nations can’t bully the small -- by opposing Russian aggression, and supporting Ukraine’s democracy… today, it is America that stands strong and united with our allies, while Russia is isolated with its economy in tatters.” According to the U.S. State Department, these joint efforts on both sides of the Atlantic “send a strong message to the Russian government that there are consequences for their actions that threaten the sovereignty and territorial integrity of Ukraine.”[iii] But what this diplomatic, politically-driven action does not account for is the material impact in growth and development of the economy.
The destruction of the Russian financial markets is certainly not something to celebrate. With the drastic contraction of the Russian economy – likely a consequence of both the drops in global oil prices and the sanctions – come three overarching geopolitical consequences: first, deeper polarization due to economic isolation; second, the galvanization of Putin’s political authority; and, finally, the entrenchment of rifts between Russia and the West. Ultimately, these three outcomes could result in Russia turning eastward, further complicating American diplomacy on the Eurasian continent.
The current sanctions have very concrete financial consequences among a population that has both a relatively low standard of living and has endured numerous economic tempests since the collapse of the Soviet Union in 1991. Beginning in March 2014, President Obama, in conjunction with similar European Union sanctions, signed a series of executive orders to target specific Russian “perpetrators” with travel restrictions and asset freezes and limit trade with certain key sectors of the Russian economy.
Prior to the Crimean Crisis, the Russian economy - despite obvious resource dependencies and signs of “Dutch Disease” - was making leaps forward, posting an 8.5% GDP growth rate in 2007 and bouncing back after the global financial crisis in 2010 with a 4.5% GDP growth rate. Moreover, entrepreneurship outlooks in 2013 were extremely strong given the strong availability of M&A funding, a highly-skilled workforce, and reforms in taxes and business regulations.[iv] But, with the recent economic contractions to a 2014 growth rate of 0.2%, efforts to open up Russia to FDI and to instigate more development will likely be in vain.[v]
While the contractions are, in part, due to the recent oil market drops, the political warfare oscillating between the White House and the Kremlin suggest that business partnerships and development are unlikely. These kinds of material consequences were partially intentional, but the effects could also become an obstacle to long-term solutions. Empirically speaking, economic integration has led to increased transparency and political reforms – think of Poland, China, South Korea, and Japan. Scholar Desmond Lachman points out, “A real danger, however, is that a Russian economy in tatters will only increase the incentives for aggressive moves abroad. This is, after all, how Putin’s era got started: with a lethal campaign against Chechnya to consolidate his regime at home.”[vi] So, while there are obvious intents to damage the Russian economy through sanctions, isolating the Russian economy could dig a deeper chasm and hinder future diplomatic cooperative efforts.
This diplomatic stalemate is already inciting the retrenchment of conflicting ideologies. Throughout the escalation of the Ukraine crisis, nationalist leadership became the battle cry to galvanize Russian support. We, as Americans, fault Putin, labeling him as a ruthless dictator seeking a return to the Cold War. But this picture is not so clear-cut from Moscow.
According to the Levada Center – an independent Russian polling center – Putin’s favorability has only increased amidst the annexation of Crimea. In January 2014, Putin’s favorability was at 65%, but with the escalation of the crisis in Ukraine and the imposed sanctions, the ratings soared to 80% in June and 88% in October.[vii] The majority of Russians view the annexation of Crimea as a humanitarian action aimed to assist a Russian-speaking population that has longstanding cultural ties extending back to Medieval Rus.[viii] The reality diametrically opposes our intent. Instead of destabilizing his regime, sanctions have bolstered Putin’s authority.
Putin’s revitalized power, heightened anti-Western and nationalistic sentiments, and growing economic concerns could result in a drastic flip to the east in Russian diplomacy and complicate U.S. efforts to build friendships across the Pacific. At the annual meeting of international Russia experts on 24 October 2014 in Sochi, Putin signaled his turn eastward: “Asia is playing an ever greater role in the world, in the economy and in politics…I predict that it is in Asia where the fate of the future will be decided.”[ix] While China and Russia have, for many years, found themselves allied by common agendas in the UN Security Council, their relationship has certainly been wary and tentative. Gilbert Rozman argues that, despite the calculated nature of this asymmetric alliance, Russia and China have built a bilateral relationship as their ideological thrusts have overlapped.[x] While there certainly remain hesitancies – particularly regarding relations with other key Asian players such as India – this burgeoning and ever tightening relationship could be a sticking point for U.S. efforts in the East. Under the Obama Administration’s “rebalance to Asia,” sincere diplomatic efforts have been made to draw Beijing and Washington together. However, stringent sanctions have tightened relations between the Russians and the Chinese, whom we continue to court. After the annexation of Crimea and despite (or perhaps because of) Western sanctions, Russia concluded a comprehensive $400 billion energy deal with the PRC, a deal that has, for many years repeatedly fallen through due to price level disputes.[xi] The former U.S. ambassador to Russia said, “I think the energy deal between Russia and China does represent geopolitical pushback against the United States, but the hegemonic impulses behind Russia’s annexation of Crimea and China’s aggressive claims to disputed islands and airspace are pushing their smaller neighbors to embrace the United States.”[xii] Thus, while the U.S. stronghold among smaller Asian nations remains, our overtures toward China may be a bit tone deaf amidst the burgeoning Sino-Russian relationship.
The use of sanctions, obviously a favorable tactic compared to outright war, is meant to coerce states to alter their political and economic behaviors. But are these sanctions truly having this effect? A closer look at Western sanctions on Russia suggest that quite the opposite is occurring. Yes, the Russian economy is drastically contracting and projected to have negative growth rates in 2015; however, the political impacts of these sanctions oppose our objectives. Putin, coping with a failing economy, is employing even more political muscle to uphold power, and the nationalistic tones resonate with a broad spectrum of the Russian populace. And, as Russia seeks partnerships with China, America objectives in the region could be compromised. Ultimately, this diplomatic tool poses a variety of benefits and compromises, and we must continuously reevaluate if the impact of these sanctions is bringing us closer to or further away from our goals.
[i] Kathrin Hille, “Moscow expects recession in 2015,” Financial Times, 2 December 2014, accessed 29 January 2015, http://www.ft.com/intl/cms/s/0/9d03a164-7a3f-11e4-a8e1-00144feabdc0.html#axzz3QDQjwUIj.
[ii] Ambereen Choudhury and Jason Corcoran, “Barclay’s Russian Chief Says Sanctions’ Impact Widespread,” Bloomberg Business, 16 September 2014, accessed 29 January 2015, http://www.bloomberg.com/news/articles/2014-09-16/barclays-russian-chief-says-sanctions-impact-widespread.
[iii] “Ukraine and Russia Sanctions,” U.S. State Department, accessed 28 January 2015, http://www.state.gov/e/eb/tfs/spi/ukrainerussia/.
[iv] Alexander Iviev and Dmitry Neverko, “Russia Country Profile,” The Power of Three: The EY G20 Entrepreneurship Barometer 2013, accessed 25 January 2015, http://www.ey.com/Publication/vwLUAssets/EY-G20-country-report-2013-Russia/$FILE/EY-G20-country-report-2013-Russia_new.pdf
[v] Igor Yurgens, “The West vs. Russia: The Unintended Consequences of Targeted Sanctions,” The National Interest, 8 October 2014, accessed 28 January 2015, http://nationalinterest.org/feature/the-west-vs-russia-the-unintended-consequences-targeted-11427.
[vi] Desmond Lachman, “Putin pushes back: Beware the wounded Russian bear,” 5 December 2014, accessed 30 January 2015, http://www.aei.org/publication/putin-pushes-back-beware-wounded-russian-bear/.
[vii] “Рейтинг Путина: аномалия или закономерность,» Публикации прессы, Левада Центр, 15 January 2015, accessed 27 January 2015, http://www.levada.ru/15-01-2015/reiting-putina-anomaliya-ili-zakonomernost
[viii] Ibid.
[ix] Joshua Kucera, “Putin Signals Russia’s Shift to Asia,” The Diplomat, 31 October 2014, http://thediplomat.com/2014/10/putin-signals-russian-shift-to-asia/.
[x] Gilber Rozman, "Asia for the Asians," Foreign Affairs, January 30, 2015, accessed January 30, 2015, http://www.foreignaffairs.com/articles/142305/gilbert-rozman/asia-for-the-asians.
[xi] James Kitfield, “The New Great Power Triangle Tilt: China, Russia vs. U.S.,” Breaking Defense, 19 June 2014, accessed 30 January 2015, http://breakingdefense.com/2014/06/the-new-great-power-triangle-tilt-china-russia-vs-u-s/.
[xii] Ibid.
