Moscow City, a recently developed business centre for the Russian capital | (c) Russian Look Ltd. / Alamy Stock Photo. All rights reserved

What would Western sanctions mean for Russia?

The unprecedented measures proposed by the US, the EU and the UK could create chaos in Russia’s economy and impoverish its population

Proposed Western sanctions could almost cut Russia out of the global financial system, creating chaos for the Russian economy and impoverishing ordinary Russians, experts have warned.

The measures threatened by the US, the EU and the UK if Russia incurs further into Ukraine would be unprecedented. Previous countries that have faced similar sanctions – such as North Korea and Iran – were peripheral to the global markets in comparison to Russia.

And while the Kremlin would likely retaliate, financial and legal experts claim that putting these sanctions on the table is one of the only ways the West can change Putin’s calculus on Ukraine.

The consensus is that the measures proposed now are unlike the sanctions issued by the West against Russia in 2014, which targeted Russians and Ukrainians directly involved in destabilising Ukraine. Those measures banned Western companies from doing business with Crimea and involved specific and limited sectoral sanctions.

This time, the EU and the US have indicated that they prepared to cap Russia’s access to foreign capital; stop Russia from importing any US technologies, which it needs for its military; sanction the Russia-Germany Nord Stream 2 gas pipeline; as well as sanctioning Russian individuals and their companies over their proximity to the Kremlin.

German chancellor Olaf Scholz said in a meeting with America’s President Biden on 7 February that Germany is “united” with the US on imposing sanctions against Russia.

The US, whose sanctions look to be the most potent, has outlined plans to sanction major Russian banks and ban the international SWIFT payment system from servicing Russia.

So far, the UK has said it will sanction individuals and businesses close to the Kremlin, including banks and energy companies, without giving specifics.

If several major Russian banks were sanctioned by the US alone, a former UK Foreign Office legal adviser told a recent webinar for specialist law firm Peters & Peters, “it could effectively shut Russia out of the international financial system, as [other] banks also seek to de-risk”.

New situation

Countries that have been subject to a similar fate, such as Syria, North Korea and Iran, were peripheral players on the global markets in comparison to Russia, said several experts, warning that the global repercussions, including any Russian response, could be significant.

Sanctions expert George Voloshin said that though Russia’s economy is smaller than the UK’s, Russia has some of the largest deposits of the world’s natural resources, which makes it significant for the global economy. He highlighted the 10% jump in the global price of aluminum in 2018, when the Russian oligarch and aluminum tycoon, Oleg Deripaska, was sanctioned by the US for election interference. In 2019, three Western-listed companies linked to Deripaska were removed from the US sanctions list after he ceded control of the firms. Deripaska himself remains subject to US sanctions.

Similarly, Adam M. Smith, a former senior adviser to the US Treasury’s sanctions unit and an architect of the country’s 2014 sanctions on Russia, told the webinar: “The Russian economy is twice the combined size of any other economy the US has ever sanctioned. Other than Russia, there’s never been a situation where [the UK, EU and US] have sanctioned major economic powers.”

Designed as a threat

The hope is that the threat of Western sanctions will be enough of a deterrent for Russian President Vladimir Putin, Smith said. “What you’re usually trying to do is limit asset flight and increase surprise in order to really change a target’s behaviour.”.

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However, Smith added, “when you’re dealing with great states, with sophisticated players that have been subject to sanctions for so long and know how the game is played, those issues are less important.

“It’s much more important to engage in clarity prior to sanctions so that you tell [Russia] what is going to happen and so you can potentially change the calculus prior to any actions by the target.”.

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7 February: US President Joe Biden says the Nord Stream 2 pipeline will not be able to go ahead if Russia invades Ukraine | (c) Xinhua / Alamy Stock Photo. All rights reserved

Coordination

The three Western jurisdictions, the US, the UK and the EU, have been busy coordinating their sanctions efforts, but they are unlikely to be identical, according to a US government press briefing.

The sanctions will be most effective if the UK, the EU and the US target the same people and entities, according to Oliver Windridge, a sanctions expert at the consultancy, rights:applied.

The US has been the most open about what it is considering, with legislators and the White House issuing several detailed statements.

The UK Foreign Office has not mentioned sectoral sanctions, instead indicating it will target individuals and companies close to the Kremlin. Before Brexit, the UK’s position during EU sanctions talks was closer to that of the US, experts claimed. Since Brexit, the UK government has tried to position itself as a European leader in sanctions policy, introducing Global Magnitsky-style sanctions in 2020, in line with the US and with a wider scope than the EU’s equivalent sanctions regime.

The possible EU sanctions described by EU Commissioner Ursula von der Leyen on 5 February seemed to mirror significant elements of the US proposals.

But the EU Commission will need to find agreement with its 27 members to decide on the package. The difficulties in doing so range from some EU members having pro-Kremlin politics to others being dependent on Russian gas imports.

Russian retaliation

Several of the experts warned of the stark retaliatory measures Russia could take. According to Smith, unlike other states the West has sanctioned in the same way, Russia has “a lot of cards to play”.

For one, said Smith, Russia could continue its policy of regional destabilisation in Eastern Europe, namely in Ukraine and the Baltic states even after the sanctions. Secondly, it could use tactics like cyber warfare to destabilise other jurisdictions, including the West. Thirdly, the authorities could make compliance with Western sanctions unlawful, something that could even have an extra territorial element, meaning executives inside and outside Russia could face lawsuits, arrests and even Interpol arrest warrants.

Lastly, Smith said that Russia does not have to only respond in kind. For example, even if Russia’s energy sector is not targeted, they could respond with their strongest card, by cutting Europe off from the gas supplies it depends on.

Russian military equipment near the Ukrainian border
The current winter weather makes armoured assault possible | (c) Dmitrii Melnikov / Alamy Stock Photo. All rights reserved

However, von der Leyen, in response to questions about the likelihood of Russia cutting off the gas, stressed that Russia depends on the sale of gas to Europe: “Two-thirds of Russia’s total revenue comes from gas and oil exports, and two-thirds of those go to Europe,” said von der Leyen.

Another warning was that Western sanctions could lead to greater unity between Russia and China, said Michael O’Kane, a senior partner at Peters & Peters. Such actions “might have a knock on effect of driving Russia closer to China, increasing the commercial and business links with China in the long term, which could actually be counterproductive”.

Ordinary Russians

The sanctions proposed are technically classed as ‘targeted’ as opposed to ‘comprehensive’ sanctions, the latter of which would block all transactions with a given sector. Previous experience shows that comprehensive sanctions isolate and impoverish the general population, while elites have the resources to evade or even exploit them, said Mark Taylor, a human rights expert who focuses on the economic dimensions of armed conflicts.

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“There used to be this argument that comprehensive sanctions were a way to kind of impoverish the society that would eventually rise up and overthrow their bad leaders,” Taylor told openDemocracy. “That logic is gone. It’s just been proven to not work and actually strengthens the regimes in certainly anything like the medium term.”

This is why, Taylor said, more limited targeted sanctions on individuals and businesses – like the ones imposed in 2014 – have become more popular with policymakers in recent years, because they limit the impact on ordinary people as much as possible while making it harder for certain actors.

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A monument to Georgy Zhukov, a Second World War Soviet military commander, in Moscow | (c) ITAR-TASS News Agency / Alamy Stock Photo. All rights reserved

Yet the targets, which would include top Russian banks, would be so significant that the “consequences will go far beyond any individual sanctions against legal entities”, according to financial sanctions expert Voloshin.

And given the impending sanctions have been communicated in advance, the Russian business elites could have moved assets to ensure they remain accessible in the event of sanctions.

“It is safe to assume they’ve been preparing for this,” said Taylor. “They will have trusted people in their networks responsible for managing certain companies that are at risk from sanctions and use shell companies. That’s the way they will ensure their money remains accessible.”

But Taylor warns that though the short-term impact on individuals and their businesses will be mostly reputational, the long-term effects “will bite”.

Targeted sanctions “make it more difficult to do business just because you have that label on your forehead, that you’ve been sanctioned,” he said . “And then, secondly, they make it more difficult to get access to resources. They make it more difficult to get money or certain commodities or certain technologies.”

Will sanctions stop Putin?

Paradoxically, explained Voloshin, after the West introduced sanctions in 2014, anti-Western and anti-democratic voices within the Russian government were strengthened.

The more liberal voices from the era of Dmitry Medvedev, who was president between 2008 and 2012, when Russia attempted to reset relations with the US, are now marginal, if not non-existent. Anti-democratic voices now comprise the right-wing of Russia’s defence and security bodies, according to Voloshin. Most of these individuals do not have significant assets in the West and are indifferent to the economic effects on ordinary people.

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Russian President Vladimir Putin | Source: Kremlin.ru

“Today, there is no effective counterbalance. They [the Russian intelligence service wing] are very powerful. And in the current context of bad relations with the West, their voices and their positions are better suited to the Russian public discourse than what the liberals might be saying,” Voloshin said.

“Oligarchs are very unpopular in Russia. They’re not, as a class, able to mount resistance to the government, on any grounds.”

“I don’t think [the political elite] have any qualms about what might happen if there are more sanctions. They will find a reason to justify it,” he continued.

Barrister Maya Lester QC told the Peters & Peters webinar that Russia is more prepared for sanctions than it was in 2014, having taken actions including “de-dollarising”, building up their own Russian SWIFT equivalent, relying less on foreign funding and trading more with China. Meanwhile, she said, the EU is still as dependent on Russian gas as it was in 2014.

The question is, said Lester, “Will Putin tolerate a greater economic hardship for Russia, which other jurisdictions might not?”


Republished from openDemocracy

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