For decades now, there has been a peace dividend from global trade. The more interdependent our economies become, the less likely we are to go to war, as we may have done in times past. Well, the crisis in the Crimea shows one of the downsides of those trade linkages ; when one country invades another, economic sanctions are just as likely to backfire on the countries imposing them, as they are to hit the intended target. Last night, Russia’s RT television channel was gleefully pointing this out – did the EU really want to impose sanctions on the Russia that provides 2/3 of Europe’s energy needs, buys 45% of its automobile exports, 18% of its chemicals and 5% of its food exports?
For this reason, the US and EU have tried to limit their sanctions to a list of individuals with close ties to Russian leader Vladimir Putin, rather than impose sanctions on whole sectors of the Russian economy. So far, the best discussion I’ve seen of the options – and the pitfalls – of the sanctions available is this briefing document by the Open Europe organisation, based in London.
For starters, a surprising amount of Russian money has flown offshore in the past five years – $421 billion, or one fifth of Russia’s entire GDP. “This suggests that there are sizeable amounts of Russian money invested abroad,” says Open Europe,” on which sanctions could be imposed, causing significant problems for high-ranking individuals and businesses.”
That’s assuming though, that the money trail can be readily identified, and blocked. No easy task:
“The routing of this money through offshore centres makes it very difficult to track. Therefore, the most effective economic measures could be a combination of targeted sanctions on influential individuals close to the top of the regime, business interests, specific firms wielding power in Ukraine (such as Gazprom) and potentially limiting sales to Russia of products on which they are externally reliant – such as machinery, chemicals and medical products.
But here’s the problem:
Sweeping energy sanctions would hit Russia the hardest, but due to the EU’s dependence on Russia’s gas – in some countries as much as 100 % of gas imports are Russian – this option is politically unlikely and could prove prohibitively expensive for the EU…..[Moreover] Russia has an array of retaliatory options including leveraging energy market power to secure favourable bilateral deals with other countries and applying tit-for-tat sanctions.
All of which suggests that while there is a great deal of diplomatic busy work going on right now – everyone from US President Barack Obama to Germany’s Angela Merkel is looking concerned, and threatening to Putin – there is not much enthusiasm or ability to do anything very substantive. France for instance, has made it clear that it would be prepared to cancel its lucrative defence contract to upgrade the Russian Navy’s assault capabilities only if everyone else involved – and they’re looking at you, David Cameron – was willing to be equally self-sacrificing:
[French Foreign Minister Laurent] Fabius was asked whether Paris planned to follow through on a EUR1.4 billion ($1.95 billion) contract to build two Mistral carriers for Moscow…..The first Mistral a high-tech amphibious assault ship capable of deploying helicopters and tanks is due to arrive in Russia by the end of the year. “If Putin carries on like this, we could consider canceling these sales, ” Fabius said. The foreign minister emphasized that such a step would only come as part of a “phase three” escalation in economic sanctions against Moscow, adding that the possible loss of the naval contracts would be “negative” for the French economy. “We will ask others – I’m thinking of the British in particular – to do something equivalent with the assets of the Russian oligarchs in London. The sanction must affect everyone,” Fabius said.
Oh, and another thing about sanctions. There’s the small, troubling matter that Russia controls a vital supply route for US forces into Afghanistan. Yesterday, this report summarised the US dependency in these terms:
As the war in Afghanistan carried on, the land-based supply routes over the Durand Line grew increasingly unstable and the United States and NATO established the Northern Distribution Network (NDN), which rerouted all supplies from the Black Sea, the Baltic, and the Russian Pacific coast. The NDN necessitated negotiations with Russia and makes heavy use of Russian territory – something that Putin could now potentially use as leverage should Western sanctions over Russia’s annexation of Crimea grow too burdensome.
However, it should be said that US commanders in Afghanistan have also testified this week that this current dependency on Russia would not be insurmountable.
Ultimately, it will come to how much the EU/US is willing to sacrifice for Ukraine, a country whose future will always be more reliant – thanks to basic geographic realities – on its relations with neighbouring Russia than with a European Union already over-stretched by its commitments to its current members. Even if the EU was willing to pour huge amounts of money into propping up the new government in Kiev – which it clearly isn’t, and certainly not on the scale that would be required to replace Russia’s prior role in the Ukrainian economy – there would still be a big question mark over the ability of Kiev to manage the transition. Much as one can admire the courage of the demonstrators in Maidan Square, the political opposition were united only by their desire to get rid of Viktor Yanukovych. In all other respects, the group that eventually toppled him appear to be a pretty dubious group of opportunists and extreme nationalists. How much is the West willing to gamble on this motley crew’s ability to govern in the national interest, rather than in the self-interest of the individuals concerned?
Obviously, much will depend on whether the pro-Russian annexation process extends out beyond the Crimea. As mentioned in earlier Scoop columns, the recent elections in the Ukraine split the country right down the middle, electorally speaking. Kiev can count on the western Ukraine and on half the centre; the other half of central Ukraine, the east of the country and the Crimea were solidly pro Russian, and solidly pro-Yanukovych. It would not take much in the way of stimulation from Moscow to set Donetsk ablaze. Calls for annexation are all too likely to arise spontaneously, from the local population.
In this respect, the media coverage of this crisis in the West has been oddly skewed. In depicting the annexation as imperial expansionism on Putin’s part – and by demonising Putin in the process – the enthusiasm of the majority of the population in eastern Ukraine and in the Crimea for this process has been downplayed, and seems almost inexplicable. More importantly, the extent to which the annexations are seen in Russia as being a defensive necessity has been almost entirely overlooked. Yet from Russia’s POV, the Ukraine is an essential strategic buffer. On this point, much of the CNN/BBC coverage of the Crimean crisis has been a bit like covering the Cuban Missile Crisis without mentioning American sensitivities about Soviet missiles being stationed 90 miles from Miami. No wonder there has been a surge in Putin’s popularity within Russia; not without justification, he is being seen as a defender of the motherland.
Ironically, if broad economic sanctions are applied, who would be likely to pick up the slack, and emerge the winner from the subsequent diversification of Russia’s energy exports? China. The Crimea of course, has been the setting for brave, self-defeating gestures by the West before. During the Crimean War 160 years ago, the Charge of the Light Brigade also did its best to inflict harm on entrenched Russian positions. (On balance, those involved in the fighting did pretty well to survive the commands of their befuddled leaders.) At the time though, the media spin made the failed attempt sound rather glorious, regardless.
Obama has no Light Brigade to dispatch, and is doing what he can. If that seems weak, it is because he has few cards at his disposal. No one wants to lose big money over the Ukraine, let alone go to war.