The US &EU – Russian sanctions
“If you compress the spring all the way to its limit, it will snap back hard. You must always remember this.”
- Vladimir Putin
The main initial reason for the recent introduction of various EU sanctions was the Ukrainian crisis. However, since 2016, a process of “escalating sanctions” has been evident. As a rule, the United States has been the primary sender of sanctions, although it has been usually joined by the European Union.
The approaches of the United States and the European Union to the sanctions against Russia differ significantly in aim, scope, decision-making mechanisms and other aspects. First and foremost, the US and EU sanctions differ in terms of their goals.
The sanctions imposed by the European Union focus on the Ukrainian issue and are associated with the implementation of the Minsk Accords.
In other words, the European Union uses sanctions as a mechanism for compelling Russia to influence a ceasefire and the observance of other parts of the agreements. Sanctions against Moscow were introduced by Brussels in 2014. The Kremlin responded by imposing an embargo on agricultural produce, food, and raw materials from countries that joined the sanctions on Russia. Since then, both sides have been extending the measures.
Unlike the restrictions imposed by the European Union, the aims of the sanctions introduced by the United States are much broader in scope and pursue a far broader set of goals.
The Ukrainian issue is included in Bill 3364 adopted by the United States Congress. In addition to Ukraine, CAATSA-legislation includes a wide range of subjects, each of which carries its own sanction or set of sanctions, like cyber security, human rights in Russia, Russia’s policy in the Middle East, nuclear non-proliferation, Russia’s energy policy, the Russian media, Russia’s malign behavior etc. Almost 700 Russian people and companies are under US sanctions at the end of 2018.
Based on CAATSA obligations, the Russian authorities see that the United States pursues, among other things, the following goals in its sanction regime against Russia (RIAC Report 37 – 2018):
- To exert an influence on the Russian political system and Russia’s foreign policy
- To isolate Russia from investments and advanced technologies in critical areas
- To consolidate the US’ European allies against the backdrop of the “Russian threat” and strengthen US influence in Europe.
- To drive Russia from Europe’s energy markets in the interests of US suppliers and achieve similar goals on the global weapons and arms markets.
The approaches of the European Union and the United States also differ in terms of adopting decisions on implementing sanctions.
- In the EU, the issue of extending the sanctions is reviewed every six months. At present they are extended automatically but the EU has a mechanism in place for promptly changing the sanctions regime in the event that the situation in Ukraine improves.
- The United States has a fundamentally different decision-making architecture with regard to the sanctions. The passing of CAATSA (PL 115-44) means that it is virtually impossible to implement any swift changes to the sanction regime. The President and his Administration will not be able to alter the parameters on the sanctions by themselves, even if they have sufficient grounds and political will to do so.
Four last years of sanctions pressure on Russia from the West have brought contradictory results. The main political objectives of the sanctions have not been achieved. Russia is not “capitulating” or making unilateral concessions, the Russian political system is largely consolidated, Moscow has managed to avoid political isolation by developing its traditional ties further and building new ones (pivot to Asia since 2012). The “teflonizing” of the Russian economy has been quite successful: de-dollarization in trade and finance, substituting the SWIFT system by the domestic solution, complex structures and arrangements in energy business as well as combined efforts and structures in BRI-EAEU context (Great Eurasian Partnership) especially regarding for the future.
Nonetheless, the sanctions have been detrimental to Russian economy and with time, the damage could have a cumulative effect on the country.
- Data on the economic damage caused by the sanctions differs in various assessments but the size range is so far estimated to be in the approximate of $ 100 billion.
- US sanctions have damaged Russia’s currency and contributed to a rise in borrowing costs and whether Russia can convince buyers of its oil and natural gas to accept payment in rubles remains an open question.
- Increased trade with China and other Asian countries has helped reduce Russia’s dependence on the dollar but the greenback still accounted for 68% of Russia’s payment inflow (2018).
Obviously, Russia is not the only country that has felt the effects, because the sanctioners themselves have suffered too.
- The main “victim” in this respect is the EU. In terms of trade relations, the European Union has been Russia’s biggest trade partner, while Russia has been the fourth largest export destination for EU goods. According to several EU/European study reports, the total loss of European countries 2014-2017 may amount up to EUR 150 billion.
- The United States has suffered far less economically as a result of the sanctions than the EU because Russia accounts for less than 1 per cent of US trade.
It is highly likely that Moscow faces prospects of harsher sanctions in coming years.
The European Union may broaden its sanctions nomenclature and the US Congress is discussing new rounds of anti-Russian penalties. The Russian central bank has warned the country’s lenders over potential risks. Russian think tanks present various ways to tackle sanctions but the most important task is to develop and diversify the Russian economy and deepen its ties with the global market and global business. Sanctions work against economically weak and isolated countries.
Russia has been systematically weaning its economy off the dollar. Putin has repeatedly warned that Russia will continue the process of de-dollarization with growing number of partners. Russia is a major exporter, with a trade surplus of $115 billion last year, of metals, grain, oil and gas that are consumed around the world – even in the west, despite the political tensions and sanctions.
In the case of accelerating tension between the countries, Russia’s top five trump cards in the sanctions game against the US might be:
The Russian government could place either a ban or some other kind of restriction on exports of high-quality titanium alloys to the US. Russian titanium company VSMPO-Avisma produces a third of the world’s titanium parts for the aircraft industry delivering 70 percent of its products to the global market. Avisma provides 40 percent of titanium components for Boeing and 60 percent for Airbus, and covers all titanium components for Brazil’s Embraer. Replacing Russian titanium would be very difficult to Boeing, even in long term.
Situated strategically between Europe and Asia, Russia could introduce higher tariffs for the transit use of its airspace for all US cargo and passenger planes or could ban the flights altogether. American carriers would either have to pay the higher tariffs or choose alternative air routes, which would mean losing in the competition with European and Asian airlines. At worst, there would be no choice but to fly around Russia, which would significantly add to fuel costs. Either way, American carriers would bear heavy financial losses which would be a disaster for the US airline industry.
LNG & other energy
Imports of liquefied natural gas (LNG) and other energy products from Russia to the US could also be banned. Russia’s reported exports of oil and petrochemicals to the US makes up just $8 billion worth, which is just 4.6 percent of Russia’s entire energy exports. The ban would be relatively painless for Russian producers who could easily re-channel those shipments to Asian buyers. The US reportedly resells Russian LNG to European countries.
Supplies of RD-180 rocket engines are seen as one of Russia’s trump cards in retaliation to US sanctions. The engines are crucial for the US space program as NASA and the Pentagon use them to launch American satellites. Attempts to stop buying them from Russia have failed because the US has been so far unable to produce a domestic alternative. The engines are used to power Atlas V rockets. Apart from RD-180 engines, the US buys Russian RD-181s. The RD-181 engine is used to power the Antares rockets that launch Cygnus cargo tugs to the International Space Station for NASA.
US companies in Russia
Despite worsening relations between Moscow and Washington, many American corporations are continuing to work in Russia without interference from the Russian government. Russia could make life difficult for such corporations. There are a large number of local Russian subsidiaries of American multinational corporations. On the other hand, there are very few Russian companies in the United States. Washington would find it difficult to respond with mirror measures.
The value of Russia’s natural resources is huge, estimated at $75 trillion while the US natural resources are estimated worth approximately $45 trillion, China’s stand estimated at $23 trillion. This may be why sanctions have not been working effectively so far.