Slowly The Hacks Realise Sanctions Don’t Work

It must now be blatantly apparent that the anti-Russian sanctions the West enacted haven’t had any effect on changing Russia’s behaviour “for the better” from the Western point of view, which after all was their purpose…

I doubt the European Commission will admit they have made a mistake but others, with more freedom, would be ignorant not to see the failure of the sanctions policy. There are those that get it however. One of those is Michael Carpenter writing for the American Interest. His prescribed way to remedy this situation is more sanctions, better sanctions, and that warrants my reaction. I quote:

Russia’s unprovoked attack on Ukrainian ships in the Black Sea in late November underscores this fact and belies the notion that the Putin regime is worn down by sanctions and looking for an “off ramp.” If anything, President Putin seems to be doubling down on confrontation with the West.

It is debatable whether the Russian seizure of Ukrainian ships was unprovoked or an escalation of Russia’s actions against Ukraine and the West but I guess this statement is necessary for Carpenter to justify his argument.

Some have argued that while sanctions have not reversed Putin’s aggressive policies, they have at least deterred him from pursuing more ambitious aims, such as the creation of a new state of “Novorossiya” in eastern Ukraine or a land bridge between Crimea and Russian troops stationed in eastern Moldova. This too is wishful thinking. During the peak fighting in Ukraine in the summer of 2014, Russian forces certainly could have tried to occupy more territory, but it seems highly unlikely that the threat of sanctions stopped them cold in their tracks and no hard evidence supports this view.

A far more compelling argument is that the Russian advance was stopped when Ukrainian society mobilized against it by helping law enforcement root out Russian provocateurs and by forming volunteer battalions to fight back against invading Russian forces.

This is a relatively sober view for a Westerner of why Russia didn’t go ahead with the creation of Novorossiya in 2014. But the issue is rather complex. Supporters of the sanctions however must come up with justifications for their policy and Russia’s reluctance to completely obliterate Ukraine comes in hand.

Over time, it is even possible that the Kremlin might come to see the cost of sanctions as greater than the perceived benefits of its aggressive policies. But we have not reached that tipping point yet, and with current sanctions alone we may never reach it.

Time works for the Kremlin. Although, I have no illusions about the ability of the Russian state to react to sanctions, the Kremlin nevertheless can use the time available to build ways around the sanctions.

Carpenter goes into lengthy discussion about why the current sanctions are not working, and that America needs to actually make sanctions hurt…

Consider the difference between sanctions on Russia and Iran. To bring Iran to the negotiating table, the Obama Administration imposed powerful economic sanctions. During their peak strength from 2012-2015, Iran’s GDP declined by 9 percent annually, crude oil exports shrank from 2.5 to 1.1 million barrels per day, and $120 billion in Iranian reserves were frozen abroad. This was accomplished by sanctioning Iran’s oil exports and by freezing transactions by Iranian financial institutions.

With Russia, the United States has adopted a far more timid approach. In the energy sector, only upstream and unconventional energy projects—deepwater, Arctic offshore, and shale—were sanctioned. Unlike sanctions on Iranian oil exports, these measures affect revenue streams that are only years, if not decades, away. Furthermore, they lead to deferred investments and unrealized opportunities, which rarely motivate political leaders to act.

Russia, unfortunately for the Carpenters of this World, is a slightly different format of a country than Iran. I am not certain America has the wherewithal to punish Russia the way Iran was punished.

Subjecting energy projects to sanctions presupposes the West is essential for their realisation. But Russia can obtain the financing, and the technology through other means. Ultimately, the West will simply lose out on business which would have benefited Europe.

Carpenter proposes asset freezes on Russian banks but even he realises this would be playing with fire.

…an incentive structure would need to be created to compel the Kremlin to re-evaluate its policy. One option would be to prohibit financing of Russia’s sovereign debt. An even better option that allows for calibrating costs would impose asset freezes on Russian banks. Freezing bank assets allows for calibration because it can be done iteratively, starting with some of the smaller banks and moving towards progressively larger targets (e.g. VTB, Gazprombank, Sberbank) over a period of time. Every set period—for example, every three or six months—a new bank would be designated by the Treasury Department until Russia was finally compelled to negotiate in good faith or cease and desist from its aggressive behavior.

To be sure, freezing the assets of all of Russia’s banks would carry significant risks of financial spillover. However, an iterative approach helps mitigate against this risk because the initial asset freezes on smaller banks would be unlikely to roil European financial markets on their own. This would put the ball squarely in Russia’s court and all stakeholders would understand what would happen and when it would happen.

If the Russians are not able to do business with Europe, they will simply not do it, and the Kremlin wouldn’t care much about those Russians hurt by this. It needs to be understood that Russia cannot be starved out, blockaded, deprived of fancy papers issued by the European Central Bank, or the Federal Reserve. Russia has oil, gas, timber, fresh water, produces large amounts of grain, and can feed herself. It is the Europeans, who need these resources, not the other way around.

One of the advantages of financial sanctions is that the Kremlin lacks a symmetric countermove. Certainly, Russia could respond by freezing the assets of U.S. companies in Russia, but this would likely hurt Russia as much as it would hurt the United States. Russia is the 30th-largest trading partner of the United States, and Russia depends on U.S. foreign investments to sustain jobs. Shutting down U.S. companies would also be a surefire way to kill off any future Western investment in Russia for a long time to come.

Ultimately, targeting Russian banks would mean depriving Russians of money. No money, no business. That’s exactly why we do not see much of it.

In terms of asymmetric retaliation, Russia could of course do any number of things. Few would have predicted that in response to the Magnitsky Act the Kremlin would halt the adoption of Russian orphans by American citizens. There is obviously little the United States can do if Russia decides on a course of action that hurts its own citizens.

This is a matter of perspective which depends on the feelings of superiority of an ignorant American. I do not think Russian citizens are being hurt by the inability of some American idiots to adopt Russian children. All remember the Dima Yakovlev case (still lacks an English language wikipedia entry)? Russian children are best served by being taken care of by Russian foster parents, in Russian homes, in Russian society. Russian citizens are further being helped by the fact that Russian orphanages cannot trade with children now.

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