In recent days, the US Congress has moved aggressively to increase the economic pain inflicted on Russia in punishment for its brazen destabilisation of eastern Ukraine and Crimea. Legislators are attempting to up the ante with Moscow by passing new laws to penalise foreign banks and energy companies for doing business in several Russian economic sectors.
The desire to inflict more economic difficulty on Russia is understandable. By imposing pain on Russia, the US and the EU can try to force Moscow to change its aggressive behaviour toward its neighbours.
But the new sanctions may not be as effective as Congress hopes, and President Barack Obama should be reluctant to enforce the penalties aggressively, as doing so would have serious consequences for the US and its partners abroad. What’s more, new sanctions are unnecessary at this point.
It’s difficult to think of what pain Washington could feasibly exact with new sanctions that would be worse than the cratering rouble and rising Russian interest rates. Congress’ new sanctions are designed to prevent Russia from turning to non-US companies for financing and energy partnerships. They set up an us-or-them choice for foreign companies, threatening their access to US markets if they conduct transactions with certain Russian companies.
Legislators are betting that foreign companies will decline to do business with Russia to preserve ties to the US, a strategy borrowed from the Iran sanctions experience.
But Russia has a large, globally integrated economy, and even with a plunging currency and massive capital flight, many investors still see long-term investment value in Russia. While the rouble has dropped almost 50 per cent and $85 billion (Dh312 billion) has left the country since the beginning of the year, many firms, particularly in China, have decided to forgo operating in US markets to enjoy continued access to the Russian economy.
If these companies continue doing business with Russia, sanctions may not tighten the vice in the way intended. Worse, the sanctions may seriously undermine US interests.
Not only will the US be moving significantly ahead of the EU on Russia, but US sanctions will also come down hard on European companies. Additionally, new US sanctions spell out penalties on Gazprom if it shuts off gas to Europe, an alarming and escalatory threat that the Europeans have carefully avoided so far. In addition to the fallout in Europe of the current Russian economic crisis, more sanctions risk a fracture of the delicate consensus between the US and the EU on how to address Russian belligerence.
If European cooperation falters, the current sanctions regime could be defanged. Over the longer term, new sanctions risk seriously undermining the development of important energy resources in Russia, namely those related to frontier oil production from deep water, Arctic and shale rock reservoirs. The measures will cause Western oil firms, along with their technology and capital, to break ties with Russia, which is poorly equipped to develop those prospects independently.
As a consequence, Russia’s ability to produce crude will suffer, chipping away at the over 10 per cent contribution Russia is expected to make to global oil markets over the next 20 years. With prices presently at a five-year low due to oversupply, degrading petro-state Russia’s ability to produce oil isn’t so worrisome.
But oil markets are cyclical, prices will eventually rise and stunting the development of frontier Russian resources could ultimately cause significant damage to the US and world economies.
Sanctions have an important role to play in preventing Russian aggression and ensuring it does not threaten its neighbours. But aggressive enforcement of the new measures under current circumstances could be ineffective at best — and seriously damaging for US interests at worst. There are alternative strategies for supporting Ukraine and pressuring Russia that should be prioritised now.
They include energy and humanitarian assistance for Ukraine and help improving Ukraine’s anaemic and corrupt economy. Further, bolstering Russia’s neighbours — whether or not with direct military assistance — can reduce the likelihood that Russia can act aggressively toward them.
The president and Congress can always enforce harsher sanctions in the future. Penalising Russia for its belligerence is a long game and the tactics, timing and coordination of economic pressure are important.
With oil prices hovering below $60 a barrel and the rouble in a steep dive, the right strategic move now in the economic chess match with Russia is for US policymakers to stand back and keep the enforcement of tough new sanctions in reserve.
