With the Ukrainian election having gone without major disruption, except in Donetsk and Lugansk, and the new president to be inaugurated next Sunday, the immediate threat of a “third wave” of U.S.-led sanctions against Russia has passed. It is now time to assess the result of the first two, and to look ahead.
The Ukraine crisis is the first case of overt great-power rivalry since the end of the Cold War. Unlike then, the military and ideological components are no longer central to the confrontation. Economic and information warfare, by contrast, are much more intense, given the new globalized environment. Economic sanctions are the present-day equivalent of war.
The attractiveness of sanctions for those who impose them lies in their asymmetrical nature. At little or no cost to one’s own economy they promise to cripple an adversary and make him change course, or even the regime. Even though the international record of sanctions is far from 100-percent successful, a few cases stand out as inspiring: South Africa under apartheid and Iran today.
When the Obama Administration decided to engage in a sanctions war against Russia, it had in mind a range of objectives. First, to make Moscow back off from Crimea; then, to prevent a Russian military invasion of Ukraine; and most recently, to keep Russia from interfering in the Ukrainian presidential elections. In U.S. domestic terms, the sanctions were meant to provide a convenient political cover to the White House.
To reach those objectives, Washington has sought to achieve the following with the help of sanctions: (a) hurt President Putin’s inner circle of friends and induce them to lean on their leader; (b) drive wedges between Russia’s power structures and its big business community; (c) incite resentment among the Russian population at large, ideally—in the view of more radical individuals—pushing them to overthrow the Putin regime.
Since the United States has only a limited capacity to damage the Russian economy directly—due to a puny (26 billion dollars in 2013) trade turnover between the two countries, it relies critically on its European allies for support, given the EU’s sizeable trade with Russia (440 billion dollars in 2013). Reducing Europe’s dependence on Russian energy supplies is also a long-time U.S. goal worth pursuing in its own right.
The first three months of sanctions have yielded ambivalent results. Crimea has been fully, and apparently easily, incorporated into the Russian Federation. The Russian troops massed on the Ukrainian border did not cross it—but arguably the intention of their commander-in-chief was to threaten and deter, not to invade and get bogged down. The Ukrainians were able to elect their president, but in two regions of the south-east local militants continued to defend their self-proclaimed republics from Kiev forces.
The Russian economy, stagnating toward recession, has not been helped by the sanctions, but these were not the cause of its deep-seated problems. Some of the immediate post-sanctions effects, such as the plunge of the stock market and a fall in the value of the ruble, were short-lived. On the other hand, raising capital on the international money market has become more costly and new potential investors were scared away from Russia. Other effects, however, were opposite to what had been intended.
Some of Vladimir Putin’s moneyed friends, admittedly, have sustained losses, but they moved on to new lucrative markets. The sanctions have given the President a powerful argument in his quest to “nationalize the elites,” who, in an effort to escape too tight control from the Kremlin, exposed themselves to foreign pressure. Putin’s popularity among the ordinary people has topped 80 percent: the Russians of all stripes are rallying around the flag. Dissenters are vocal, but they are also fewer than they have ever been in recent times. Patriotism is in vogue.
The European Union and Japan have joined the U.S.-led sanctions, but they could not help noticing the very unequal burden-sharing among the allies. In a characteristic outburst, Wolfgang Ischinger, one of Germany’s most experienced diplomats, said, with reference to Arizona Republican John McCain, a leading sanctions proponent in the U.S. Senate: “Arizona is not going to lose a single dollar” through sanctions—unlike Germany, with its 6,200 companies engaged in Russia. On the eve of Chancellor Angela Merkel’s trip to Washington, the German business community had effectively blocked serious sanctions against Moscow. This situation is not limited to Germany. France has decided to go ahead with completing and delivering to Russia a naval ship; Britain has balked at moving against Russian interests in the City of London; Japan says Mr. Putin’s visit to their country next fall is still on.
Russia has also found a way to counter-attack. Taken by surprise by Visa and MasterCard discontinuing their acceptance of credit cards issued by a sanctioned Russian bank, the Russian government has re-activated steps to create a national electronic payments system. Deputy Prime Minister Dmitry Rogozin announced that Russia would stop supplying the United States with rocket engines used in U.S. booster rockets; remove GPS stations from Russian territory; and withdraw from the International Space Station project. The sanctions have added a compelling rationale for developing and implementing a new economic policy in Russia, along the lines of Putin’s idea of re-industrialization.
In geo-economic and geopolitical terms, the sanctions have helped Russia’s ongoing pivot to China. During Putin’s visit to Shanghai in May, Gazprom and CNPC signed a 30-year, 400 billion-worth deal on Russian gas sales to China. This historic agreement stands on par with a similar accord concluded in the late 1960s which brought Russian gas to West Germany. Gazprom’s hand may have been forced by the developments in U.S.-Russian relations, but Russia’s possible tactical loss on the price issue is likely to be compensated by a strategic gain of a new growing market and a closer alignment with a rising power.
To conclude: The new situation in Russia’s relations with the United States, and to some extent with its allies is going to last until, at minimum, the end of Barack Obama’s second term in office. Obama is cautious, but harsher sanctions, attacking Russia’s energy and financial sectors, cannot be fully excluded. Modernizing the economy—a must if Russia is to hold out in this new contest—is extremely difficult under conditions of confrontation with the United States, where economic sanctions are the weapon of choice. The stakes for Russia—from the Kremlin to the elites to the middle classes to the ordinary people—are very high.
Essentially, Russia has three main options open to it. One is to use the new situation as a stimulus for self-improvement. “Never waste a good crisis,” as Rahm Emanuel once quipped. To succeed against the United States, one has to do very well indeed, and to be very smart. One must be very courageous, too, by addressing the well-known ills, such as official corruption, legal injustice, and lack of accountability—and replacing them with meritocracy, proper courts, and stable property rights. This would be a hard way up.
Another option is administrative and quasi-ideological mobilization, in which Russia will be seen as a besieged fortress in need of strong discipline and harsh punishment for dissenters. Since this path is unlikely to lead to an economic success story, Russia’s response to the U.S. pressure will necessarily be asymmetrical, gravitating toward military instruments. Even if a war is averted, Russia is likely to lose heavily, maybe even going through a third catastrophe in a hundred years. This would be a disastrous way down.
Lastly, if Russia is unable to move up, but is equally fearful of going down, its leaders may elect to move east, embracing China as its new source of finance, investment, and even technology. This would be ironic: having fought so hard to preserve its sovereignty and status vis-à-vis the West, Russia would be willingly surrendering both to the dominant power in the east. Like the proverbial ancient warrior, Russia is standing at a crossroads.
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