Weak Economic Sanctions Likely Will Have No Effect on Russia

Yesterday marked a big day in world history as Crimea voted in favor of seceding from Ukraine in order to join Russia. The annexation of Crimea will be the biggest annexation of a European territory in many decades. The vote came with a lot of opposition from the United States and the European Union, as both parties made announcements of sanctions to be carried out against Russia. President Obama’s first round of sanctions included the “blacklisting” of seven Russian politicians and four Ukrainian politicians believed to have supported the annexation of Crimea. The European Union responded with the blacklisting of 22 Russian politicians, with four being listed by both parties. Putin and his cronies responded to these light sanctions with laughter. Vladislav Surhov, a Putin aide who was blacklisted by the United States, responded to news of his sanctions by saying, “What interests me about the United States are Tupac Shakur, Allen Ginsberg, and Jackson Pollock. No Visa is needed to access their works. So I’m not missing anything.” Many of those “blacklisted” aren’t believed to have any foreign assets, so the effects of this first round of sanctions are extremely minimal. (WSJ – Russia Moves Closer to Absorbing Crimea, Despite Sanctions)

As a result of the weak sanction proposals announced by the US and the EU today, it is believed that Putin will make an announcement tomorrow in Moscow announcing the absorption of Crimea. The US and EU will likely respond to this announcement with stronger rounds of sanctions against Russia. Currently in Washington there is legislation being drafted to broaden the sanctions to any company doing business with any blacklisted Russian individual or company. The current proposal is very similar to the sanction proposal announced in 2007 by the Bush Administration against Iran. The sanctions imposed against Iran effectively reduced Iran’s oil exports by half and froze the international banking system in Iran, effectively crippling the Iranian economy. Despite the similarities in sanction proposal, any proposal will likely be limited due to Europe’s reliance on Russian trade.

According to Eckhard Cordes, the Chairman of Eastern Committee of German Business, “Tough economic sanctions would quickly weaken not only the Russian economy, but also Europe’s economy.” Over the past two decades many European firms have invested billions of dollars into Russia to take advantage of a European market with robust growth opportunities. As a result many of Europe’s largest firms, such as BP, Societe General, Danone, and Royal Dutch Shell, have significant assets in Russia that they rely on for a large portion of their revenue. As a result of the influence of many large European firms, it is hard to see any significant sanctions being enacted against Russia. As put simply by Frederic Oudea, the CEO of Societe General, “both regions have too much to lose.” This belief was portrayed in the markets today as many of these companies with large exposure to Russia traded up. (WSJ – Response to Crimea Vote Sets Western Companies on Edge) Simply put it is believed that the self-inflicted costs of sanctions far outweigh any benefits from the sanctions.

Furthermore, the announcement of the sanctions seemed to have minimal constrains on firm investments in Russia. Despite Ford announcing that they will be seeking consulting on their investments in Russia, many analysts said that they believe further sanctions will not affect many European firm’s ability to collect revenue on their Russian assets. Overall, the current sanctions, as well as Europe’s reliance on Russian trade, seem to be forecasting all impending threats towards Russia as discredited. Unless, the EU is willing to take economic concessions in order to sanction Russia it seems unlikely that they can provide Russia with a credible threat. As the EU continues to move through their recovery, it seems unlikely that they would make any sanctions that would jeopardize their economic recovery.