The Russian Sanctions Debate at the Valdai Conference


2016-11-22 By Richard Weitz

The Russian speakers at Valdai differed on the impact of the Western sanctions applied against Russia’s energy, defense and banking sectors in response to Moscow’s annexation of Crimea in March 2014 and its support for the separatist insurgency in eastern Ukraine.

Since 2014, the United States and the European Union (EU) have renewed and expanded these economic sanctions several times.

Western governments believe such sanctions punish Russia by imposing costs for its past behavior, deterring further Russian aggression, underscoring Western solidarity in the face of common threats, and compelling Russia to make concessions regarding Ukraine and other issues.

The Western sanctions have been directed against individual Russian leaders and companies as well as limited sectors of the Russian economy.

The most stringent of the EU and U.S. sanctions limit Western economic engagement with Crimea, apply travel and asset freezes to prominent Russians and Ukrainians responsible for Moscow’s actions in Ukraine, and constrain the transfer of military items and sophisticated energy technologies to Russia.

Valdai Conference Panel. Credit Valdai Discussion Club
Valdai Conference Panel. Credit Valdai Discussion Club

Experts debate the extent the sanctions have harmed the Russian economy by amplifying the adverse impact of the Russian ruble’s fall in international value, the flight of assets from the Russian economy, and the decrease in global prices for Russian oil and gas.

In 2015 the Russian economy did decrease by about 3.8 percent. Nearly half of Russia’s federal budget is derived from its oil and gas export revenue, so the fall in prices for these commodities since 2014 has forced major cutbacks in non-military spending.

This loss of revenue combined with limits on high-tech energy sales to Russia have degraded the modernization of Russia’s energy sector.

The sanctions and downgrading of Russian government bonds has restricted Russian access to Western financing and required the central bank and government to draw from the country’s previously large national reserve funds.

Despite their economic costs, the sanctions have not changed Moscow’s policies towards Crimea or any other critical national security issue. The sanctions have not stopped Crimea’s integration into the Russian Federation nor have they reduced Russia’s political-military support for the war in the Donbass region of Ukraine.

The Obama administration expressed hope that Moscow might alter its course if Russian President Vladimir Putin’s popular support began to seriously erode due to the economic costs of the sanctions.

However, polls show a surge in President Putin’s popularity following Crimea’s annexation, despite the resulting Western sanctions, collapse of the Russian ruble, and general economic downturn.

Russian policy makers may have thought that the Western sanctions regarding Ukraine would weaken over time, given the rapid reversal of their earlier sanctions imposed after the 2008 Russia-Georgia War. This experience likely dissuaded Russian leaders from making major concessions to end the sanctions.

Russian policymakers may also have hoped that Western businesses, certain Russian-friendly political figures, and other interest groups that favor good economic or energy ties with Russia would dilute or circumvent the sanctions. European political movements opposed to sanctions have been especially prominent in Austria, Greece, Hungary and Slovakia.

Russian strategic communications and counter sanctions on EU imports have sought to feed European resentment at being forced to “pay the bill” for U.S. policy in Ukraine.

(The main Russian sanctions on the United States have been entry visa bans on current and former U.S. officials such as ex-U.S. Ambassador to Russia Michael McFaul).

Vladimir Putin Addresses 13th Annual Valdai Discussion Club © Sputnik/ Maksim Blinov
Vladimir Putin Addresses 13th Annual Valdai Discussion Club © Sputnik/ Maksim Blinov

Russian policymakers may also have expected that bellicose nuclear rhetoric and assertive military maneuvers might have aroused Western peace groups alarmed by the recent war threats in Europe, which have reached Cold War levels.

In Asia, Russian policymakers may have anticipated that Japan and South Korea would avoid harsh sanctions that could threaten diplomatic ties with Russia.

Japanese Prime Minister Shinzo Abe has strived to reach a deal with Moscow over their islands dispute (what Russians call the Kuril Islands, and the Japanese their Northern Territories), while South Korean officials want Moscow to press Pyongyang to curtail its aggressive actions and join Russian-sponsored economic integration plans between the Koreas.

Yet, until now the Western governments have shown surprising solidarity behind the sanctions on Russia.

In particular, European governments have renewed them on several occasions despite suffering much greater economic losses than the United States from the foregone trade and investment.

Donald Trump’s election as the next U.S. president has increased Moscow’s prospects for sanctions relief.

Many expect Russian-U.S. relations to improve under Trump, leading to a repeal of at least some U.S. sanctions, along with those of Asia and, despite deeper misgivings about Russia’s intentions, some European countries.

At a minimum, the change of power in Washington has made it unlikely that the United States, NATO, and the EU will adopt more comprehensive (Iran-style) sanctions on the Russian economy and society, deny Russia access to U.S. and EU financial systems like the SWIFT global electronic payments system, or curtail additional science and technology projects, including in the civilian space and energy sectors.

At Valdai, most of the Russian officials downplayed the negative effects of Western sanctions, describing them as strengthening the Russian economy by promoting diversification as well as self-sufficiency.

They also highlighted the costs to European countries in maintaining them.

They agreed that Russia needed further integration with the world economy to spur innovation and efficiency, but insisted that they would never compromise Russian national security imperatives to do so.

One senior Russian official who spoke at the conference said that the sanctions had made it harder for Russia to secure foreign investment and loans to pursue large infrastructure projects and other undertakings, citing the first quarter of 2015 as being particularly difficult.

However, he still claimed that through “internal administrative mobilization” and “active economic policies,” Russians have been able to mobilize their internal reserves while government policies, including privatization of major state corporations, have encouraged domestic entrepreneurship. In the assessment of one official, “the combined effect, at the present time, is more positive than negative.”

Another official, taking a long-term perspective, noted that the recent setbacks had not erased the large growth in Russia’s GDP that had occurred during the past two decades: “despite all the turbulence in the economy and the international scene. In 15 years we moved from low-income country to a medium income country.”

In a public session, Putin argued the adverse impact of the sanctions had been overstated, and that they cost Russia well below 0.5 percent of its GDP.

He also said that European countries “have lost almost 60 billion dollars or euros – I don’t remember exactly” in foregone exports to Russia.

Putin stated that the fall in oil and gas prices began a cascade that pulled down the value of Russia’s exports of related products like petrochemicals and fertilizers. Putin also acknowledged that the sanctions had discouraged investment in Russia due to the uncertainty.

Putin said that Russia “will work to get rid of them but this should be a two-way street.”

In contrast, former Finance Minister Alexei Kudrin estimated the sanctions annually cost Russia one percent of its GDP growth.

He told the media on the sidelines of the Valdai conference that, “whoever says that these sanctions are insignificant” does not understand that they “seriously affect our economy, growth, and standard of living.”

Given this burden, he argued, “we should take measures to reduce the sanctions for the sake of our people.”