Robert Kahn

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Robert Kahn analyzes economic policies for an integrated world.

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Sanctions: What’s Next?

by Robert Kahn
March 13, 2014

Sunday’s referendum in Crimea looks set to lead to escalating tensions and an intensification of sanctions. To date, U.S. and EU sanctions proposed or introduced have been modest and targeted, focused on individuals (presumably mostly Ukrainian) regarded as responsible for “infringements on Ukrainian sovereignty,” and do not include measures on Russian corporations, financial transactions or cross-border trade. That could change next week.

The U.S. government has taken the lead, with sanctions on those directly involved in destabilizing Ukraine, or who have misappropriated funds. For all the focus on congressional legislation, for the most part the president has the authority to extend financial sanctions through a flexible executive order.

The EU has been more tentative in implementing sanctions, no doubt concerned about possible Russian retaliation and the potential economic disruptions that would result. Nonetheless, there appears to be a growing consensus in Europe on the need for a tougher response to Russian actions in Crimea. The 28 EU nations have agreed to a three-step collective response to Russian aggression in Crimea. The first stage has involved suspending visa, trade, and investment negotiations with Russia, and freezing the accounts of 18 associates of Ukraine’s former regime–including ousted President Yanukovych.

The EU’s second stage of sanctions–which could be rolled out as early as Monday–could include asset freezes and travel bans on those “responsible for actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine”, as well as the cancellation of all EU-Russia summits. According to Reuters, the list of people subject to sanctions would include people “close to Putin in the security services and military establishment as well as on prominent members of the Russian parliament”.

In the third stage, if Russian aggression continues, EU sanctions would include trade restrictions, an arms embargo, and broader economic sanctions for Russia’s elite. It could also mean applying existing financial rules more rigorously.

Would sanctions work?

It’s hard for sanctions to be effective. The record is spotty, and many of the cases where they have been perceived as successful in achieving political or economic agenda—including most recently Iran—were counties whose economies were small, less developed or less integrated in international markets. To be effective, these sanctions need to cast a broad net—if they are not comprehensive and multilateral, they may be easily evaded. Consequently, the new measures are being coordinated between the EU, the United States, Switzerland, Turkey, Japan, and Canada in an effort to ensure the sanctions net is as tight and effective as possible.

What will make sanctions effective in this case is also a risk. Russia’s business elites have strong ties with the West, and it is reasonable to believe that sanctions against them and their interests can have a meaningful effect on their welfare. That in turn should create conditions for a compromise with Russia. But that greater degree of financial integration also makes retaliation potentially more disruptive. EU market is customer to 45% of Russia’s exports, and Russia is also dependent on Europe to supply the majority of its machinery and transportation equipment. 75% of foreign direct investment (FDI) funding Russia’s economy is in the hands of investors from Europe. Presumably, though, retaliation would accelerate Europe’s efforts to diversify away from Russian energy.

One can hope that the threat of sanctions could lead to a de-escalation and negotiation, but it looks increasingly likely at this point that we will head to stage two. Sanctions look set to intensify should Russia annex Crimea after this weekend’s referendum. Given Russia’s apparent intent in maintaining control over Crimea, they may have to remain in place for a while. Other measures outside sanctions to punish Russia may also be floated.  In this scenario, the creation of “off-ramps” becomes all the more important.

 

Post a Comment 2 Comments

  • Posted by German Firepower

    Germany and France have enough firepower vs. Putin and Russia.

    They will represent the new formed EU forces to protect the EU interests in the Ukraine, the Baltic states and Crimea.

    For now – military actions are not needed.

  • Posted by veritas

    the construction of the future United States of Europe, are based on peace and Universal harmony, if Ukraina, must belong to the United Europe.

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