The economic and political consequences of Russian sanctions

The economic and political consequences of Russian sanctions

The shooting down of Malaysian airlines Flight MH17 on July 17 with the loss of all 298 on board has increased pressure for harsher sanctions against Russia. Europe and the US will determine which Russian individuals and companies to target, writes Prince Michael of Liechtenstein.

These measures should force Russia to end support for the separatists in Eastern Ukraine and use its influence to terminate their activities. This pressure is certainly necessary.

The question is: Are such economic sanctions the right measure and what are the consequences?

The hope is that economic sanctions will hurt the oligarchs in President Vladimir Putin’s inner circle and they will pressure the president. If that fails, they could build an opposition against President Putin.

Economic sanctions have become a popular tool, but are rarely successful. They could even increase President Putin's approval rate among Russians. It is also unlikely that the oligarchs will stand against President Putin when he is so staggeringly popular. And if they do, their chances of success are limited.

The Russian economy can be described, superficially, as raw material based. The export of raw materials is the main source of income. The rest of the economy, especially durable consumer goods, has been largely neglected and is dependent on imports.

This is the main weakness of Russia’s economy. The West’s assumption is that this makes Russia highly vulnerable to sanctions and will hurt the oligarchs personally.

The biggest economic threat to Russia today would be a drop in oil and gas prices on the world market. This is totally unconnected to sanctions.

International financing institutions such as the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) are used as political tools already. They are not taking on new projects and it may be that financing commitments already agreed in Russia may not be honoured. This is a real problem for the businesses involved.

Normally, trade and economic and business relations are the best way of maintaining peace and exercising a strong moderating influence. Sanctions will do the opposite and will not influence Russia’s politics in a positive way.

They may, however, result in re-orientating Russia's economy. Russia is perfectly capable of creating an internal economy and substituting imports from the West. This would mean hardship for a while, but the result could be more economic independence. Russia still has high foreign exchange reserves which could help bridge the economic transition.

History shows that imposing sanctions against a country has frequently resulted in greater innovation in the country being penalised.  This could - in an odd sort of way - create an opportunity for Russia to develop products for its home market. The ‘oil and gas curse’ - Russia’s total economic dependence on the price of oil and gas - could be broken.  This is, at least in theory, advantageous to Russia, as long as living standards and the economic freedom of the population is increased by this process. It is more likely, however, that it will lead to a planned economy, which will not necessarily improve living standards sufficiently. But it would increase the autonomy of Russia’s economy because Russia has other trading partners apart from the EU and the US.

Another question is how long is Western Europe prepared to accept the economic damage the sanctions cause to their own economies. Russian retaliation has already hit Polish agriculture and German exporters are feeling the effects that uncertainty over sanctions has created.

The whole sanctions process is likely to humiliate and antagonise Russia, driving its support even more towards ultra-nationalist tendencies. But Europe has to live with its Russian neighbour. Equitable relations are necessary and trade is key.

Any power which is militarily weaker and lacking political doctrine takes a dangerous step in imposing trade and economic sanctions. This could cause a war.

Only a strong military presence by the West will impress Russia. It was the immediate rejection of any military involvement in Ukraine by the US at the outset of the current crisis which has made Europe a defence dwarf. This gave Russia carte blanche.

It is highly unfortunate that toothless sanctions, which may have a long-term detrimental impact, are the only tool Europe has left. A credible defence would make all the difference.

If that is lacking, then a creative, clear and consistent foreign policy defending our interests, but not insulting the adversary, is needed at the very least.

Related reports

Merkel and Putin in ‘secret’ Ukraine deal?

Europe’s politics of appeasement

Russian tactics in Ukraine test divided West’s defence policy

The West’s ‘double standards’ over Ukraine play a part in Flight MH17 tragedy

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