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Mainstream, VOL LI, No 14, March 29, 2014

Will Ukrainian Crisis and Economic Sanctions on Russia Lead to Moscow’s Political Isolation?

Wednesday 2 April 2014


The US President, Barak Obama, has demon-strated that he has succeeded along with his West European partners in isolating Russia for annexing Crimea by excluding Vladimir Putin from attending the G-8 meeting on March 25, 2014 held in the Hague which was originally scheduled to be held in Sochi. The West has also warned of political isolation and “significant consequences” for Moscow’s actions in Ukraine and that Russia “has a clear choice to make”. As expected, there was indifferent reaction from Russia and the Russian Foreign Minister, Sergei Lavrov, has contended that all economic and financial issues are being discussed at the G-20 meetings and not at the G-8. But at the same time there is a speculation and threat whether Russia could be excluded from the G-20 meeting to be held on November 26, 2014 as indicated by the Australian Foreign Minister. This could be a serious global issue and at the moment Russia has taken comfort from the strong reaction by leaders of the BRICS on March 25, 2014 insisting that no one member can unilaterally determine this issue.

Prior to that Obama had imposed visa sanct-ions on 30 senior Russian officials including Gennady Timchenko, Putin’s chief of staff, and close associate, Sergei Ivanov, Vladimir Yakunin, the influential head of Russian Railways and wealthy businessmen in Putin’s “inner circle”, including Yuri Kovalchuk, the head of Bank Rossiya, which is called “the personal bank for senior officials of the Russian Federation” having close ties to Russia’s leadership. The list also includes Putin’s advisers Sergei Glazyev and Vladislav Surkov, Federation Council Chairwo-man Valentina Matviyenko, and Sergei Naryshkin, of the State Duma (Lower House). There was no worry for Russian officials on US sanctions on March 19 and in fact they scoffed at that move, stating that they had neither any assets in the United States nor any desire to visit the country. Hence these visa sanctions may not have any major effect. In fact Putin’s advisor, Vladislav Surkov, has ridiculed the sanctions stating that he did not need visa to go to the USA for accessing the works of Allen Ginsberg and Jason Pollock. At the same time not to lag behind in retaliation, the Russian Foreign Ministry banned nine US lawmakers and officials from travelling to Russia. Nonetheless, Putin wanted to send a shrewd diplomatic signal of intent of de-escalation of the situation since Russia supported the proposal of the OSCE mission in Ukraine and the Foreign Minister of Russia, Lavrov, met the Ukrainian Foreign Minister in the Hague on March 25 which was difficult even as Russia has not recognised the new government in Kiev.

Economic Sanctions

Apart from these political policy measures, the USA and Western countries have imposed targeted economic sanctions and even threatened broader measures if there is any incursion by Russia into Ukraine. From the initial Russian official reactions it appears that Putin seems to be prepared to handle the situation if economic sanctions that are targeted and limited at the level of measures against individuals. But the possibility of wider sanctions might not be ruled out as repeatedly indicated by Barak Obama intended to inflict high cost to Russia.

Firstly, there might be a significant impact on the Russian economy if there will be sharp dec-line in Foreign Direct Investment (FDI) from the USA and West European countries. In the opinion of US business firms, even though the level of US investment in Russia is significantly smaller than the European Union’s, but it is nonetheless “substantial”, as reported by USA Engage. Hence US officials contend that multilateral sanctions were preferable to those introduced unilaterally by the USA. Because unilateral sanctions could hurt US business firms and hence would be counter-productive if Russia takes counter-measures.

In fact foreign investment is linked to technology transfer from the West to Russia as many strategic sectors of the Russian economy have been lagging behind due to neglect of the policy of diversification and modernisation by Putin disregarding Dmitri Medvedev’s effort during his presidency from 2008 to 2012 to give emphasis on modernisation and innovation of the economy. This is evident from the fact that the Hi-Technology Park at Skolkovo near Moscow has not fully materialised.

Secondly, the Russian economy will be affected if European Banks refuse to renew short-term debts of Russian private and state enterprises which account for over 650 billion dollars. This might also aggravate recession in the Russian economy, which has low GDP growth of less than four per cent and near double digit inflation. As opined by US finance and legal expert Steve Ganis, the Bank Rossiya, with about $ 10 billion in assets, will be effectively shut out of US dollar activities worldwide. As per some Western reports, Russian companies took $ 58 billion in Western loans in 2013, up from $ 38 billion in 2012. Moreover, about $ 8 billion in loans are currently being negotiated as reported by The Moscow Times; these are in jeopardy because of the tensions over Ukraine. Sharp decline in the Russian stock market since the crisis began has already made borrowing more expensive for companies with reduced market capitalisation, and the cost of insuring their debts has already been on the rise. In fact, as opined by Andrei Aslund, Russia is highly dependent on the global financial situation which was evident in the fall of 2008 when the Russian stock market fell from May 2008 until October by no less than 80 per cent. In fact the Russian stock market was also hit in March 2014 when the Ukrainian crisis took a sharp turn.

Thirdly, if wider sanctions are imposed affecting Russia’s foreign trade, then it might affect its economy. In that case Russia can challenge them through the WTO dispute-settlement mechanism. Hence Russia has insisted that unilateral sanctions violate international law and, as argued by some analysts, there is provision under GATT to impose trade restrictions only for ‘national security reasons’.

Fourthly, there is a strong, though unlikely, speculation that if as a reaction Russia national-ises firms having foreign investment, say Rosneft, which has 20 per cent share of Western capital, then Russia could be excluded from world trade, with severe consequences for Moscow. In this context Boston lawyer Ganis said that sanctions on the Russian energy sector could be “quite disruptive” to Russian energy companies. But it also needs to be noted that West Euro-pean countries, particularly Germany, depend heavily on Russia. In Germany’s case it depends to the tune of one-third of its energy needs on Russia. Hence such sanctions could also affect global markets and create problems for European countries dependent on Russian energy. It needs to be noted that during the last about two decades there has been substantial integration of Russia into the global economy and hence the inevita-bility that international sanctions against Russia will have palpable costs for the West as well.

Fifthly, Russia has not succeeded significantly in controlling money-laundering and Russian oligarchs have also kept their money abroad. Part of this money has come back as FDI and it also plays an important role in the shadow economy which accounts for 25-30 per cent of the Russia’s total economy. There is speculation that there are linkages of these Russian billion-aires holding money in tax haven countries with the business tycoons of the West. Hence they might try to exercise influence on the Western countries on the issue of economic sanctions that are imposed and anticipated by those states. There is also the expectation that Russian billionaires in their own interest might exert some positive influence on Russian policy-makers to de-escalate the crisis.

Sixthly, Ukraine will be the biggest loser since Russia is its largest trade and economic partner. Moreover, it earns over four billion dollars in fees for the transit of Russian gas to Europe.

Lastly, under prevailing conditions with the West, Russian policy-makers will adopt a strategy of Look East increasing trade and econo-mic relations with China, India and so on. At the same time with consistently close political ties with Iran, Syria etc., Putin might exert pressure on the Western powers to serve Russia’s interest.

Thus in lieu of conclusion it may be stated that the Ukrainian crisis has entered a new phase. Ukraine has certainly gone close to the Western powers who have declared their policy-decisions to isolate Russia and implement economic sanctions to demonstrate the high cost Russia has to pay for any of its actions affecting the interests of Ukraine. Having ann-exed Crimea, Putin has a challenging task to ensure that Russia will overcome the crisis.

Dr R.G. Gidadhubli is a Professor and the former Director, Centre for Central Eurasian Studies, University of Mumbai.

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