Russian Analytical Digest No 157: Sanctions

No. 157 17 December 2014 russian analytical digest www.css.ethz.ch/rad www.laender-analysen.de SANCTIONS ■■ANALYSIS The Impact of Sanctions on Russia 2 By Peter Rutland, Middletown, CT ■■ANALYSIS Russia’s Food Embargo 8 By Stephen K. Wegren, Dallas ■■ANALYSIS Russian Economic Sanctions as Carrots and Sticks in the Near Abroad 13 By Randall Newnham, Reading, PA, USA ■■ANALYSIS Humanitarian Migration from Ukraine 17 By Olga Gulina, Berlin Institute for European, Research Centre Center for German Association for Russian, and Eurasian Studies Institute of History for East European Studies Security Studies East European Studies The George Washington University of Zurich University University of Bremen ETH Zurich RUSSIAN ANALYTICAL DIGEST No. 157, 17 December 2014 2 ANALYSIS The Impact of Sanctions on Russia By Peter Rutland, Middletown, CT Abstract This article provides a concise overview of the sanctions that the Western countries imposed on Russia as a result of its aggression in Ukraine. The sanctions are having a more serious impact than President Vladi- mir Putin anticipated, but have yet to induce Russia to engage in more cooperative behavior. An Unexpected Invasion that impose travel bans and asset freezes on individual Vladimir Putin’s decision to annex the Crimea in March members of the elite.2 In 2012 the US Congress passed 2014 caught the international community by surprise. the Magnitsky Act, under which in April 2013 18 named Recognition of national sovereignty and the inviolabil- Russian officials were sanctioned for participation in the ity of borders are central to the international state sys- 2009 death of corporate lawyer Sergei Magnitsky.. Rus- tem, and since 1991 the Russian Federation (like the sia retaliated against the Magnitsky Act with the “Dima Soviet Union before) had been an ardent defender of Yakovlev” law banning U.S. adoptions, and a list of 18 these principles. Americans sanctioned for involvement in the Guanta- Russia was incensed by the Western recognition of namo Bay detention center and the arrest of Russian the independence of Kosovo in February 2008, and arms dealer Viktor Bout. The Magnitsky Act was a prec- responded by granting recognition to South Ossetia and edent for the sanctions that were introduced on Russia Abkhazia in August 2008. Still, Crimea was assumed to in the wake of the annexation of Crimea.3 be immune to irredentist claims from Russia, not least because Russia had signed the 1994 Budapest Memo- The West Responds to Russian Aggression randum guaranteeing the territorial integrity of Ukraine, Less than a week after President Viktor Yanukovich fled in return for the latter giving up its nuclear weapons. Ukraine on February 22, unidentified pro-Russian gun- Putin’s action demanded a response. Since mili- men were seizing public buildings in Crimea. Separatist tary action by the West was off the table, given Rus- rallies took place in many cities of eastern Ukraine; Rus- sia’s nuclear arsenal, economic sanctions were the tool sian troops were deployed to the Ukrainian border; and of choice. Sanctions have become an increasingly pop- on March 1 the State Duma passed a resolution autho- ular instrument over the past two decades: they apply rizing the use of Russian troops in Ukraine. pressure on intransigent governments without risking On March 16 Crimeans voted in a hastily organized the destruction that military action entails. referendum to join the Russian Federation. The next day Their record has been mixed. They are most effective the US and EU imposed asset freezes and travel bans when they are multi-lateral, and they succeed about one on 21 individuals deemed to be directly involved in the third of the time—though skeptics question whether the occupation of Crimea. Nevertheless on March 18 Putin desired changes in government behavior can be attrib- signed into law a bill adding Crimea to Russia, and uted to sanctions alone.1 Sanctions helped bring about delivered a remarkable speech in which he embraced the the end of apartheid in South Africa, but have failed to rhetoric of Russian ethno-nationalism, including omi- halt the nuclear ambitions of North Korea or Iran. They nous language condemning “national traitors.”4 Two are a blunt instrument, harming the economies of the days later President Barack Obama added several more countries applying the sanctions along with the target names to the sanctions list, including what one admin- nation. Sometimes they trigger an aggressive response istration official described as “Putin’s cronies, his money by the offending country, deepening the crisis. Critics people,” such as Gennady Timchenko, Yuri Kovalchuk, argue that sanctions are a demonstrative act that allows and Arkady and Boris Rotenberg.5 The theory was, in leaders to make a moral statement, without actually influencing developments on the ground. 2 Uri Friedman, “Smart sanctions: a short history,” Foreign Pol- Typically the costs of sanctions are borne by the icy, April 23, 2012. The first individually targeted sanctions were common people and not the leaders making the deci- against Haiti in 1993. sions. Hence there arose the idea of “smart” sanctions 3 Emma Gilligan, “Sanctioning Russia: Magnitsky, human rights and the Ukrainian crisis” (forthcoming). 4 “Address by President of the Russian Federation,” March 18, 1 Gary Clyde Hufbauer et al (eds.) Economic Sanctions Reconsid- 2014. <http://eng.kremlin.ru/transcripts/6889> ered (3rd edition) (Washington DC: Peterson institute, 2009), 5 Mark Landler, “Obama steps up Russia sanctions,” New York 127. Times, March 20, 2014. Kovalchuk’s Bank Rossiya was also RUSSIAN ANALYTICAL DIGEST No. 157, 17 December 2014 3 President Obama’s words, that “we can calibrate our (including organizations active in the separatist regions, response based on whether Russia chooses to escalate and corporations illegally seized by Russian authorities), or to de-escalate the situation.”6 Russia responded by followed by an additional eight individuals and three banning nine U.S. officials from visiting Russia, includ- entities on July 30. ing Senator John McCain, who joked that “I guess this Putin responded by doubling down: on August 6 he means my spring break in Siberia is off.” On March 24, announced counter-sanctions in the form of a one-year meeting on the sidelines of a nuclear security summit in ban on imports of fruits and vegetables, dairy products The Hague, leaders of the G7 group of advanced econo- and meat from countries that had imposed sanctions on mies announced that it was suspending Russia’s mem- Russia.10 Russia is the EU’s second biggest food market bership (Russia had joined in 1998, making it the G8) after the U.S., and EU imports accounted for 25–30 and cancelling the summit that was scheduled to meet percent of the food consumed in Russia. In 2013 Rus- in Sochi in June 2014. sia imported $16 billion of food from the EU and $1.6 Fighting broke out in eastern Ukraine in April, cul- billion from the U.S.11 minating in a May 11 referendum in which Donetsk Meanwhile, many Western companies with long- and Lugansk allegedly voted for independence. Unlike term commitments in Russia assumed the sanctions in Crimea, Russia did not act on the results of these ref- would soon blow over. Exxon continued its work with erenda. Fighting intensified as the summer progressed, Rosneft in the exploration of the Arctic shelf, under though Russia seemed to be signaling that it was inter- a 2011 partnership agreement. In defiance of pressure ested in a compromise solution. from the U.S. government, they started drilling with On April 28 the U.S. added seven more individuals their West Alpha rig on August 9.12 and 17 related companies to the sanctions list.7 But with During August intensified attacks by Ukrainian the EU economy stagnating, the powerful Ostauschuss forces were closing in on the rebel-held cities of Donetsk group of German industrialists doing business with Rus- and Lugansk, but increased action by Russian mili- sia urged Chancellor Angela Merkel not to bow to U.S. tary units (whose presence Moscow either denied or pressure to introduce broader sanctions.8 On July 16 described as “volunteers”) forced the Ukrainian govern- the U.S. moved beyond “smart” sanctions on individu- ment to sign a cease-fire on September 5. The cease-fire als to introduce “sectoral” sanctions on strategic corpo- brought an end to major military operations but spo- rations.9 Two energy firms (Rosneft and Novatek) and radic fighting continued, with the death toll climbing two banks (Gazprombank and Vneshekonombank) were to some 4,700 by the end of the year. barred from all but short-term borrowing (more than On September 12, 2014, the U.S. and EU imposed 30 days) on U.S. markets, and eight Russian arms firms additional penalties. The U.S. Treasury barred the banks were embargoed. Sberbank, Bank Moskvy, Gapzrombank, Rosselkhoz- Then on July 17 separatists shot down Malaysian Air- bank and VTB, and defense industry conglomerate Ros- lines Flight 17 en route from Amsterdam to Kuala Lum- tec, from raising funds of more than 30 days maturity; pur, killing all 298 on board. This atrocity, and Russia’s for Transneft, Gazpromneft, Novatek and Rosneft the seeming unwillingness to help bring those responsible limit was 90 days.13 Russian companies will have to to justice, caused a groundswell of support for tougher refinance about $130 billion of debt by the end of 2015, action, particularly in the Netherlands and Germany. and the sanctions will make this a more costly proposi- On July 25, the EU expanded its sanctions to an addi- tion. The EU sanctions also targeted bank credits and tional 15 top Russian government officials and 18 entities weapons manufacturers, and issued an updated list of 24 sanctioned individuals.14 The more radical option of embargoed.

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