US and EU Economic Sanctions Against Russia

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Table of Contents

Introduction
Importance of the Topic
Brief Historical Background
Main Activities and Operations
Findings/Economic Impact of Sanctions
Challenges for the EU and the USA
Conclusion/Recommendations
References

Introduction

The economic sanctions against Russia were applied by the USA and the European and EU-based countries in 2014 when the Crimean and later Ukrainian crises occurred. The first sanctions were applied after the annexation of Crimea by Russia; the next rounds of sanctions were imposed after the escalation of the Ukrainian crisis in the Donbass area (Bond, Odendahl, & Rankin, 2015). So far, three rounds of sanctions were imposed by the USA, EU, and other countries (e.g. Australia, Canada). In 2014, Russia imposed sanctions against American and Canadian individuals, as well as banned food imports from the USA, EU countries, and others.

Importance of the Topic

The sanctions have had a severe impact on the economy of Russia and Russian rouble; they have triggered a financial crisis that began in 2014 and has not stopped since. These series of events demonstrate how local and international conflicts can influence foreign trade and what crises and losses they might cause. Analysis of the sanctions and their impact on the USA, EU, and Russia is crucial to understand whether the sanctions have helped de-escalate the conflict or they have brought more harm and losses both to the business and to the economy of all states that took part in rounds of sanctions.

The analysis will also demonstrate how economies can be intertwined and dependent on each other. The efficiency of sanctions is not supported by some of the states; that is why it is necessary to understand why some states believe sanctions to be a good tool against Russia’s invasion of Ukraine, while others point out their inefficiency or aim to veto them.

I selected this topic because the armed conflict in Ukraine has had a tremendous impact on the world; it has shown that new type of Cold War is possible. Moreover, it is still unclear if the sanctions have been the right choice as the conflict in Ukraine continues, and Crimea is still annexed by Russia. In this paper, I will analyze and discuss the details of the crisis and how it has lead to a downgrade in the relationships between the USA, EU, and Russia.

Brief Historical Background

In November 2013, after former Ukrainian President Viktor Yanukovych had stated that preparations for Ukraine–European Union Association Agreement were ceased, demonstrations began in Kyiv, the capital city of Ukraine. In February 2014, Russian military troops were seen in Crimea; in March, the annexation of Crimea began with the Crimean referendum and declaration of the independence of Crimea. Later Crimea became a federal subject of Russia (Black & Johns, 2016). In April 2014, pro-Russian protesters in the Donbass area seized some of the government buildings and declared that two republics would be formed: the Donetsk People’s Republic and the Lugansk People’s Republic (Black & Johns, 2016).

The Ukrainian government began an armed operation against the rebels known as “anti-terrorist operation” (ATO). Russian support of rebels in the Donbass area had different forms: Russian volunteers were sent to the war, Russia traded weapons and armoured vehicles to rebels, and, as some stated, Russia had also sent its military troops to Ukraine, although it never explicitly admitted it (Black & Johns, 2016). Although Minsk agreements were implemented, the governments of most states did not find that Russia and pro-Russian rebels followed the rules prescribed in Minsk agreements. Thus, the sanctions were not lifted, and some of them were extended by the EU, the USA, and other countries.

Main Activities and Operations

The direct trade between the USA and Russia was not very large: in 2013, 5.6% of Russia’s goods were imported from the USA; 2.7% of its goods were imported in the USA in the same year (Nelson, 2014). The foreign investment of the USA in Russia in 2013 made up 3% (Nelson, 2014). In 2013, only 1.19% of U.S. imports of goods were imported from Russia (Nelson, 2014). Nevertheless, Russia and the USA were actively cooperating on the firm- and sector-level in the previous years. Moreover, Russia was one of the major suppliers of various metals to the USA, i.e. titanium and palladium (Nelson, 2014). The USA also imported iron, steel, fertilizers, synthetic rubbers, etc. from Russia. Russia is dependent on the American dollar, as it is used in oil transactions – “a key export for Russia” (Nelson, 2014, p. 190).

In 2014, the government of the USA imposed sanctions against Russia: assets of particular individuals were frozen, as well as assets of various banks, including, for example, the bank Rossiya which is believed to be the “personal bank of Putin” (Nelson, 2014, p. 191). Assets of some individuals close to Putin were also frozen. Financial transactions with different Russian companies (e.g. Rosneft, Rostec, and Sberbank) were also restricted. Russia had been excluded from G-8; instead, the USA, Canada, members of the EU, Japan, and the United Kingdom established G-7 (Nelson, 2014). However, Russia was not very dependent on the trade with the USA, but its economic ties with Europe and states of EU were much stronger.

After Malaysian Airlines Flight 17 was shot down, presumably by pro-Russian separatists, EU expanded the sanctions to fifteen Russian government officials and eighteen organizations that were connected to the war in the Donbass area (Rutland, 2014, p. 3). Counter-sanctions from Russia had followed: import of fruit and vegetables, meat, and dairy products from countries that imposed sanctions on Russia was banned for one year (Rutland, 2014). As Rutland (2014) states, in the year prior to the war Russia has imported “$16 billion of food from the EU and $1.6 billion from the U.S.” (p. 3). In September 2014, the USA and EU imposed additional sanctions on Russia: Russian banks, bank credits, and loans, as well as weapon manufacturers, were the targets of these sanctions.

The EU also imposed sanctions against energy sector and companies’ activities engaged in it (Rosneft, Gazprom Neft, and Transneft). These sanctions were considered as more effective, as they did not target individuals but rather sectors of Russian economy; thus, the impact of these sanctions was more severe than bans of individuals’ visas and assets. Nevertheless, the sanctions were not targeting gas and oil export from Russia (Jones & Whitworth, 2014). This has happened because EU countries are highly dependent on gas provided by Russia, although restrictions on the gas supply would have had a severe impact on Russia’s economy (see Fig. 1).

Figure 1: Gas Supplies by Russia (Source: McCarthy, N.).

As the sanctions were imposed, a major drop in oil prices also occurred, resulting in the severe financial crisis in Russia that by that time had not recovered from the global crisis of 2007-2008. These events lead to a recession in 2015, and World Bank predicted stagnation in the Russian economy; the predictions fulfilled (Dolidze, 2014). As the conflict in Ukraine had not ceased, and Crimea was still annexed by Russia, some authors suggested that another round of sanctions would be imposed on Russia in the next years.

So far, the sanctions did not target Russia’s participation in the World Trade Organization (WTO) and Society for Worldwide Interbank Financial Telecommunications (SWIFT); although Visa and MasterCard had not functioned in Crimea in 2014-2015, Russian banks were not excluded from the SWIFT (but this step was suggested by several policymakers) (Dolidze, 2014). Thus, although it is still possible to exclude Russia from the SWIFT system, it is also possible that such measures will bring harm to the EU countries as Russian gas supplies will be paid for in rubles if Russia agrees to continue supplying the EU at all (Kreutz, 2015). Dolidze (2014) believes that other measures could be more helpful, such as providing Russian youth an opportunity to study in the EU, organize campaigns that will counter Russian propaganda against the EU and the USA, and support independent research in Russia (Dolidze, 2014). This approach is described as more democratic and providing a long-term investment.

Findings/Economic Impact of Sanctions

The greatest and most severe impact of sanctions was experienced by Russia, although the USA and the EU countries have also experienced certain losses. In 2014, the Finance Minister of Russia had stated that the sanctions would cost Russia 40$ billion, and another 100$ billion would be the cost of falling oil prices (Rutland, 2014, p. 4). The sanctions have also caused capital flight that reached 130$ billion in December 2014 (Rutland, 2014, p. 4). German exports to Russia decreased; the American company Morgan Stanley cancelled the sale of the oil trading division to the Russian company Rosneft (Rutland, 2014). In the course of the year, rouble has lost 58 percent of its value (Rutland, 2014). If sanctions are maintained, it is estimated that a 25 percent drop in oil output will happen (Rutland, 2014). However, gas and oil industry were not the ones that suffered from the sanctions. The airline sector has also experienced serious restrictions: a low-cost subsidiary of Aeroflot named Dobrolyot was suspended because of the sanctions imposed on it. Dobrolyot had offered regular flights to Crimea; as it was not allowed to lease Boeing and Airbus aircraft anymore, it had to suspend the operations (Kreutz, 2015).

As the depreciation of the rouble had not stopped, some government officials believed that it was not due to the sanctions and weak economics of the country, but mismanagement of certain individuals (i.e. the Central Bank head Elvira Nabiullina) (Rutland, 2014). As Visa and MasterCard restricted processing payments in the two major Russian banks, SMP and Rossiya, the state began to create a National Card Payment System that would allow Russia stay independent of global financial markets (Rutland, 2014). Thus, Russia is capable of reducing the impact of sanctions by finding other ways to support its economy.

Challenges for the EU and the USA

Although the impact of the sanctions was severe, not all countries agreed that they were a practical tool for changing Russian foreign policy. As some of the countries are more reliant on Russian export and import than the others, there is no full agreement between them. For example, 71% of Finland’s oil imports come from Russia (Dolidze, 2014). Finland also derived profits from Russian tourism that had reduced in 2014 due to economic sanctions (Dolidze, 2014). Cyprus and Turkey did not support the sanctions and bans of visas, which has lead to increased trade between the countries. Moreover, they had also benefited from the Russian tourism as the destinations they offered for Russian tourists were more beneficial than the ones offered by other European countries that supported the sets of sanctions.

Although Russian market has suffered from the country’s one-year ban on imports from European countries, it has allowed third world countries export meat, fruits, and vegetables; thus, the sanctions were not as effective as the USA and EU wanted them to be (Dolidze, 2014). Moreover, the sanctions on Russia have already encouraged the state to find or establish other economic institutions that will not be influenced by Europe (Bond et al., 2015). The question arises whether this decision will be more profitable for Russia or the USA and EU. It is clear that Russia is interested in finding an initiative that will not be affected by the USA and EU, and the next set of economic sanctions may not be as efficient as estimated (Bond et al., 2015).

Conclusion/Recommendations

As the sanctions have proven to be partially effective and have had a noticeable influence on the economy of Russia, the USA and EU have various options: they can prolong sanctions as their effect may grow and the pressure will end successfully; lifting the sanctions is also an option, but it can lead to dangerous consequences because annexation of territories will be considered as unpunishable; other individuals, as well as the President of Russia himself, can become targets of the sanctions to assure that Russia will eventually change its foreign policy (Bond et al., 2015). At last, a new set of sanctions can have new objectives, for example negatively affect Russia’s military development. Such approach would allow the USA and EU put additional pressure on the Russian economy and, possibly, influence its foreign policy as well.

References

Black, J. L., & Johns, M. (2016). The return of the Cold War: Ukraine, the West and Russia. London, England: Routledge.

Bond, I., Odendahl, C., & Rankin, J. (2015). Frozen: The politics and economics of sanctions against Russia. London, England: Centre for European Reform.

Dolidze, T. (2014). EU sanctions policy towards Russia: The sanctioner-sanctionee’s game of thrones. Brussels, Belgium: CEPS.

Jones, E., & Whitworth, A. (2014). The unintended consequences of European sanctions on Russia. Survival, 56(5), 21-30.

Kreutz, A. (2015). Russia’s place in the world. New York, NY: Algora Publishing.

McCarthy, N. (2014). Europe is highly dependent on Russian gas.Statista. Web.

Nelson, R. M. (2014). US sanctions on Russia: Economic implications. Current Politics and Economics of Russia, Eastern and Central Europe, 30(1/2), 187-201.

Rutland, P. (2014). The impact of sanctions on Russia. Russian Analytical Digest, 157(4), 2-8.

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