Targeted Sanctions on Russia Will Work, But Mostly for Vladimir Putin

This article was external pageoriginallycall_made published by the external pageDiplomatic Couriercall_made on 30 April 2014.

The three rounds of sanctions implemented against Russia are more about saving face in the short term than they are about creating costs for Moscow. Ultimately, they are necessary but counterproductive.

If anyone thinks that Russian elites were unprepared for this eventuality, they are mistaken. They have already priced in the cost of the sanctions, and domestically, the sanctions have made heroes out of a set of generally loathsome characters. Russia’s oligarchs are particularly adept in the use of intermediaries, shadow companies, and shell entities. Their assets will prove difficult to find. The more vocal divas of Russian politics, like Dmitry Rogozin, have been openly laughing at being on the sanctions list. The more thoughtful and reserved Vladislav Surkov was quoted in the Moscow Times saying, “This does not bother me—on the contrary, I am proud. I consider this a kind of political Oscar from the U.S. for best male supporting role.”

The West has no means to redress Russia’s annexation of Crimea. On the contrary, targeted economic sanctions are only playing into Vladimir Putin’s hands. Restoring Russian influence on its periphery through the Eurasian union is one project of his presidency, but not the most important one. Putin is focused on creating a sense of Russian identity and a substantial buffer within the current political system so that Putinism will survive after he is gone. When he returned to the presidency, Putin felt betrayed by the protests on Bolotnaya Square and was surprised by the response of many Russians. In his mind, Russian elites and government officials were insufficiently "Russian". They held money, property, and sent their children abroad. This all had to change. He began a campaign to force Russian officials to move their bank accounts back home and get rid of property in the West.

Eventually he made it the law. In May 2013, Putin signed a law to ban government officials from possessing foreign assets, or overseas accounts, including the heads of key state industries in Russia, especially the energy companies. Of course there are always those who maintain accounts through shell companies abroad. Hence targeted sanctions from the EU and the U.S. work in his favor. They might do the one thing he never could: make Russian government officials and elites more Russian by forcing their money back home. Putin has been trying to nationalize Russia’s elite, and now the West has become a partner in that project. One of his biggest problems over the years has been grappling with how to create a Russian identity of other than "not Europe." Moscow has not been able to come up with a national narrative and a sense of pride outside those contrived by the state. Over the past year, his confrontation with the U.S. over the Snowden affair, gay rights, and foreign adoptions has served to build that identity. The costs the U.S. and EU have implemented will only further his goal.

Other sectors of Russia’s economy are equally difficult to affect. Russia’s budget depends on oil, but its most significant political tool is natural gas. The West cannot embargo Russia’s natural gas easily, because of high dependence amongst some European states and significant vulnerability amongst large consumers like Germany. Western leaders cannot significantly affect the price of oil either, without also damaging the interests of many of their oil-exporting allies. Even if they wanted to, Russia is in effect too big to fail. In truth, nobody wants to live in a world where Russia has burned through its foreign exchange reserves and has entered a downward spiral of internal instability. Moscow knows this, and hence it expects symbolic sanctions on parts of its economy that are not crucial to the state budget. Its currency might temporarily lose value, its market might decline, but investors will always return because structurally there have been no changes in the Russian economy and they are always looking to make money. Russia is macro-economically stable and cheap money in the West always motivates investors to place it somewhere abroad. The Russians know that Western money will come back—it always does.

There is an even bigger problem when it comes to tackling Russian money in Europe. Ben Judah wrote in Politico outlining the extent to which Russia’s crony capitalism has co-opted Western elites. The case tends to be somewhat overstated, but it is doubtful that any European capital, especially London, knows how much Russian money is involved in its financial system. If Europe intends to punish Russia economically, energy dependence will not be the only hurdle. While the West failed to integrate Russia into its security or economic structures, Russia has effectively integrated Europeans into its system of crony capitalism and corruption. Russian money has many allies in Europe. A continent that has seen very little top line growth over the past six years is not in a good position to start sacrificing financially.

What can the West do to make Russia pay for its annexation of Crimea? Not much, in the short term, that is worth doing. Kicking Russia out of the G8 only reinforces Putin’s narrative that the West is an enemy, and that Russia has no friends or allies there. Without China or India, it is hardly the world’s VIP club anyway. Furthermore, Russian elites are debating whether or not they should turn more towards China as an economic and political partner for the future. They no longer see the Western system as the only model to pursue. China is, after all, a state capitalism success story in Russian eyes. Putin may not necessarily believe in all of this, but he is clearly exhausted of dealing with the U.S. and Europe. There are advocates amongst his advisers for turning east, and Russia will soon sign a seminal gas supply deal between Gazprom and China.

Using sanctions to influence Russian decision-making in Ukraine is a losing battle. The West has learned no lessons from an entire year of losing battles with Russia in 2013. Deep down Putin likely hopes that U.S. sanctions inconvenience the general Russian public. They are used to being restricted by Moscow, but not by the West. Putin will make sure that the blame is assigned accordingly. His administration has nurtured anti-Americanism, and the U.S. is finally lending some credibility to a perception that Putin has been trying to spread for years. He is clearly willing to accept a long-term shift in U.S.-Russian relations in order to secure Russian interests in Ukraine. Given the importance of the country to Russia, and its low strategic relevance to the West, Moscow calculates that time is on its side. Just like after the 2008 war with Georgia, Western rancor will subside, the sanctions will be lifted, and in a few years they will be back to business as usual.

Of course the sanctions are not completely worthless. Hurting the Russian stock market will eventually force Russian oligarchs to take a haircut on margin calls, but more substantive damage will be caused when major Western investment funds pull out of Russia to protect their corporate image. Once burned, these will take a long time to return. That is the West’s strongest tool. Investment powerhouses like Blackrock have taken a clear stand against Russia—self-serving but effective. They will do the most damage. A lack of Western investment will hurt Russia, but it is not in Europe’s long-term interest to genuinely damage the Russian economy. It will not restrain Putin now and could make Russia more unstable and difficult to predict under anyone who follows him. Russia will have to accept at least a 1-1.5 percent loss in GDP growth as a consequence, and suffer significant capital outflows.

This is all a small victory. Russia’s economy was going to be in a recession anyway. The West is clumsily shifting the blame from Vladimir Putin to itself. His popularity grows, opinions of the West decline, and Russia’s economy accelerates on an already predictable trajectory. All of this will add up to less Western influence and more broken pieces to pick up at the end of this chapter. These actions are not reducing Russia’s relevance in the world—they are reducing Western relevance in Russia. The U.S. and EU have been dealt a bad hand of cards. They are unable to stop Vladimir Putin in Ukraine and are steadily losing the Russian population as well. Once the current quiver of targeted sanctions runs out, the West will be out of options to hide that it has no strategy for dealing with Russia.

Michael Kofman is a Program Manager and Research Fellow at the Center for Strategic Research at National Defense University’s Institute for National Strategic Studies. The views expressed are his own and do not reflect the official policy or position of the National Defense University, the Department of Defense, or the U.S. government.