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Western Economic Sanctions on Russia Over Ukraine, 2014–2019

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Western Economic Sanctions on Russia Over Ukraine, 2014–2019 FOCUS Anders Åslund In March 2014, the European Union and the United States announced Crimea-related sanctions Western Economic Sanctions with visa bans and assets freezes on individuals on Russia over Ukraine, and companies accused of undermining democracy, misappropriating Ukrainian property, and violating 2014–2019 human rights. Gradually both the US and the EU have expanded their sanctions to people responsible for Russian policy on Crimea and enterprises operating there. Ukraine has cut off almost everything − elec- tricity, water, trade, and transportation − isolating Crimea from the outside world.1 In comparison with other countries, the United A novelty was that the United States sanctioned States is particularly keen on economic sanctions, four of Putin’s cronies, namely Yuri Kovalchuk, Ark- and it is becoming ever more so. In the US foreign ady and Boris Rotenberg, and Gennady Timchenko, policy debate, the point is often made that sanctions as well as their Bank Rossiya. The EU sanctioned are not a foreign policy, only one of many tools. In Kovalchuk and Arkady Rotenberg as well, and a fifth practice, however, sanctions have become a major crony Nikolai Shamalov, but it has not sanctioned feature of US foreign policy. For many years, the Boris Rotenberg or Gennady Timchenko because United States has been reluctant to expand foreign they are Finnish citizens. These sanctions were Anders Åslund aid, which has been highly unpopular with the elec- based on the insight that Russia was a kleptocracy. Atlantic Council and Georgetown torate. Diplomacy does not have a high standing in Similarly, sanctions were imposed on enterprises University the United States. Under George W. Bush, military owned by the state or cronies, and only exceptionally force dominated foreign policy, resulting in the long on private enterprises. and costly wars in Afghanistan and Iraq. After these The aim of the Crimea-related sanctions was traditional forms of foreign policy have been found primarily to isolate and stalemate Crimea economi- wanting, economic sanctions have gained promi- cally, but also to punish the culprits, to stop Russia’s nence under Presidents Barack Obama and Donald aggression, and to deter Russia from further aggres- Trump. sion. Crimea remains utterly isolated, although the For policymakers, economic sanctions have common view is that nothing will happen until the many attractions. No Americans have to be sent Putin regime ends in Moscow. The standard parallel abroad and no troops are being killed. Nor do they is with the Baltic countries after the Soviet occu- involve any budget allocations. For a big country pation of them in 1940, which the United States never with limited foreign trade such as the United States, recognized, and in 1991 they restored their inde- the cost of sanctions appears small. Thus, sanctions pendence. Major trade sanctions on commodities have become the US foreign policy tool of choice. such as oil and gas were out of the question, because The United States has imposed sanctions on dozens their effects would be too great on the Western of countries, most severely so against Cuba, North economies. Korea, Iran, Syria, and Venezuela. The Crimea-related sanctions did not deter the As sanctions have proliferated, they have Kremlin from proceeding with further aggression in become more specific with regard to aim and means. Ukraine. In April 2014, anonymous Russian special The purpose of this paper is to investigate the forces tried to repeat their success in eastern and Western sanctions on Russia related to Ukraine. southern Ukraine, but unrest took root only in parts First, why were they imposed and what was their of Ukraine’s two easternmost regions of Donetsk and aim? Second, what effects have they had? Which Luhansk. As the Ukrainian military advanced against sanctions have been most effective? What prob- the Russian-backed forces, Russia sent in regular lems have arisen? Third, what has Russia’s effect troops in August. been? Finally, what lessons can be drawn for the In response the United States imposed more future? substantial sectoral sanctions on Russia on 16 July, and the EU did so on 31 July. Most other Western SANCTIONS ON RUSSIA OVER UKRAINE allies − Japan, Canada, Australia, New Zealand, Switzerland and Australia − joined the US-EU sanc- On 18 March 2014 Russia annexed Crimea, swiftly tions but no developing country did. The July 2014 integrating it into Russia. This came as a complete sanctions went much further than the Crimea sanc- surprise to the West. Military support for Ukraine tions. They covered three sectors: finance, oil, and was never considered an option, but the West felt it defense technology, focusing on large state compa- had to do something, so it imposed sanctions. Rus- nies. Also, individuals responsible for Russian policy sia offered a special challenge. With an economy in the occupied territories and enterprises involved roughly three times as large as Iran’s, Russia was the 1 Aleksashenko (2016) offers an excellent and detailed analysis and biggest economy the West had sanctioned. CRS (2019) provides all the relevant details. 14 CESifo Forum 4 / 2019 December Volume 20 FOCUS were sanctioned. The financial sanctions prohibit- and gas, accounting for two-thirds of all Russian ex- ed lending to the sanctioned state banks and com- ports. If Russian oil had been sanctioned, oil prices panies for 30 days or more, and the European Bank would have skyrocketed to the benefit of the Krem- for Reconstruction and Development was blocked lin. Moreover, the Europeans opposed any sanction from offering new financing in Russia. The energy on Gazprom. Similarly, Russia’s substantial metal sanctions were limited to three kinds of oil devel- exports were too important to be sanctioned. opment: deep offshore drilling, arctic offshore, and tight oil. They did not harm production in the short EFFECTS ON RUSSIAN POLICY AND ECONOMY term, but in the long term. The EU insisted that gas must not be subject to any sanctions because of its The effects of sanctions are multiple. Did they change great dependence on Russian gas (CRS 2019). Kremlin behavior? What was the economic effect of The United States coordinated the sanctions the sanctions? The Western sanctions were imposed over Crimea and Eastern Ukraine with the EU and in parallel with the oil price collapse in 2014, which other allies, reinforcing their impact. After the flood- makes it difficult to separate the two impacts. gates had been opened, the US has imposed one The Crimea sanctions aimed to isolate Crimea sanction after the other on Russia. In December for the foreseeable future, which seems to have been 2012, the US adopted the Sergey Magnitsky Act for attained. Even big Russian state companies such as human rights sanctions. It proceeded with sanctions Sberbank and VTB refuse to do business in Crimea related to Syria and North Korea, and in December because of the particularly severe Western sanc- 2016 sanctions because of cyber and election inter- tions on Crimea. Instead, already sanctioned Rus- ference were imposed. In response to Russia’s use sian banks and state banks designed for occupied of nerve gas in the United Kingdom, the US imposed territories have moved in, showing that these sanc- new sanctions based on the 1991 Chemical and Bio- tions are a severe deterrent (Åslund 2018). logical Weapons Control Act (Fried 2018). The sanctions related to eastern Ukraine had President Barack Obama imposed the Ukraine- several goals. First and foremost, they were sup- related US sanctions through presidential executive posed to incite the Kremlin to stop the Russian mil- orders, which meant that they could be modified itary offensive, aiming at taking ‘Novorossiya’, the at any time. During the election campaign in 2016, southern and eastern Ukraine, about which Putin Donald Trump repeatedly criticized the US sanctions spoke so eloquently on 17 April 2014 (Putin 2014). on Russia, arousing fear that he would actually abol- Putin did drop Novorossiya from his speeches, while ish them. Therefore, the US Congress codified these it was always less probable that the Kremlin would sanctions into law in the Combating America’s Ad­­ evacuate eastern Ukraine. versaries through Sanctions Act (CAATSA), which Economically, the most important sanctions President Trump signed into law on 2 August, so that have been the financial sanctions connected to Rus- the president no longer could alter the Russia sanc- sian aggression in eastern Ukraine. Western banks tions without the consent of Congress. were afraid of being trapped. Even the four big In April 2018, the US Treasury issued its first Chinese state banks obeyed the US financial sanc- Ukraine-related sanctions based on CAATSA. They tions, because they have activities in the United were so severe that they caused a shock. The Trea- States and all dollars pass through New York, thus sury sanctioned 24 people and 14 enterprises. Most being subject to US jurisdiction, allowing the US of the people sanctioned were quite close to Putin, authorities to impose sizable fines. in­­cluding his former son-in-law Kirill Shamalov. Sev- The most obvious effect of the financial sanc- eral big oligarchs were sanctioned, notably Oleg tions is the development of the size of Russian total Deripaska. These were designations, meaning that foreign debt. It declined from USD 732 billion in June no US person was allowed to do any business with 2014 to USD 482 billion in June 2019 − that is a re­­ these people or enterprises. Finally, these sanc- duction of USD 250 billion or 16 percent of GDP (Cen- tions hit some very big enterprises, notably Deri- tral Bank of Russia 2019). Russian corporations had paska’s company Rusal, which was a listed company no choice but to pay off their debt service as it fell and accounted for 6 percent of global aluminum due, and they had hardly any possibilities of refinanc- production.
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