Bursting the Bubble

Taming the Bear: How EU Sanctions fail against Russia

2 June 2017 | by

Skepticism towards the efficacy of sanctions is wide-spread, and in fact most of the literature to be found on the topic is deeply pessimistic. Thus, three years into the conflict between Russia and Ukraine, and after the European Union and allies imposed sanctions on Moscow, it is hardly surprising that those measures did not lead to the targeted outcomes. The EU is particularly clear in stating that the sanctions are targeting Russia’s leading political individuals with visa bans and asset freezes, while the country’s industries relevant for Moscow’s foreign policy campaign in Ukraine, its major energy and defence companies, are targeted by limited economic sanctions. Additionally, the access to Western financing is now closed for major Russian banks. Hence, these sanctions are not aimed at Russia’s general population, and are constructed as smart sanctions which attempt to raise the costs for the political elite inside Russia, while abandoning the logics of collective punishment.

However, the smart sanctions are likely to not be that smart after all, and in fact even counterproductive. Here is why.

The Impact of EU’s Sanctions on Kremlins Elite

Given its authoritarian regime type, Russia’s existing system in fact benefits from Western sanctions. The political class in Moscow appears to be highly detached from the masses, while the system itself is designed to concentrate decisive power in the hands of Kremlin’s inner circle. Russia’s political economy rests on the idea of redistribution of rents to the allies of the existing regime. These rents are provided through exports of highly competitive resources, such as oil and gas, of which Russia is one of the world’s leading producers.

While, admittedly, Mr Putin is being increasingly criticised by some key political actors inside Russia, there also seems to be a general consensus with regard to the Kremlin’s moves to insulate key allies from the negative impact of Western sanctions. There are several prominent examples. The Bank Rossiya is supposedly an essential bank of Mr. Putin’s inner circle and was targeted by U.S. sanctions in late March 2014, yet the Kremlin did not hesitate: “State corporations, local governments and even the Black Sea Fleet in Crimea were suddenly shifting their accounts to the bank […].”[1] Additionally, until the end of 2014, after being targeted by sanctions, the companies of Arkady Rotenberg and Gennadiy Timchenko who are considered to be Putin’s closest allies, reportedly had a 12%-increase in government contracts. Coined the “Rotenberg Law”, moreover, was the move which guaranteed a compensation to Russian citizens whose assets were frozen by foreign governments.

These tactics, combined with the re-allocation of resources shows the uncontested nature of the current regime, but also its siege mentality. Other observers note that Russia’s ruling class became even more dependent on Mr. Putin, as being targeted by Western sanctions is now the common ground that even former rivals seem to share. For instance, after sanctions imposition, Gazprom offered the struggling Rosneft its help with a project in the Arctic.

 

Economic Securitisation

In 2014-2015 additional resources were allocated to spheres of greater economic importance, while at the same time also holding the largest share of employees: the energy and pharmaceutical industries, the agricultural machinery, and the military-industrial complex. Furthermore, after the imposition of Western sanctions, Russia introduced its own countermeasures by banning Western food imports. As a result, and as import-substitution started to gain ground as a concept, it leads to Russia’s growing economic isolation and thus decreases its vulnerability to (potential) additional Western sanctions. These measures go in hand with Russia’s increased prioritisation of economic security, as outlined by its new National Security Strategy approved in 2015.

To be fair, securitisation tendencies were already existent prior to the imposition of Western sanctions in 2014. However, the current political climate inside Russia proves it to be one of the main priorities among decision-makers in Moscow. The goal of these isolationist policies is decreased future economic vulnerability in the face of continuous external threat. Nevertheless, official rhetoric does not seem to lead to consequent implementation: by mid 2015, only 7 out of scheduled 127 imports from EU/NATO-states were replaced. Meanwhile, the food embargo has had first positive effects and benefitted the domestic agricultural sector. Overall, these measures, such as the ban on Western food stuffs, which otherwise might rather be unpopular with the average domestic consumer, are being justified through the acute international crisis, in the name of Russia’s security.

 

Russia After Crimea: A New Social Contract

Some commentators consider Kremlin’s rhetoric mentioned above to be a result of a new social contract: Russian citizens appear to be willing to accept sacrifice in favour of the restoration of Moscow’s former glory. After the annexation of Crimea in early 2014, there has been a considerable evidence in favour of a strong and surprisingly lasting rally-around-the-flag effect. Mr. Putin’s approval ratings skyrocketed to over 80% and haven’t fallen below that mark ever since. This has made researchers point to the explanation of this phenomenon through both the official interpretation of international events by the state-controlled media, but also through sanctions in fact providing fruitful ground to Kremlin’s narrative of an imminent external threat, while also creating an alibi in favour of the Russian government for the failure of the latter to address the economic hardship of the recent years. Additionally, the perception of the public appears to be inaccurate as to who is in fact targeted by EU’s and other Western sanctions, while Russia’s countermeasures help to cement the perception that the sanctions are aiming at all Russian citizens.

Standing up to the West gave a majority of Russian citizens a sense of pride for their homeland, as can be observed by the public support for government’s foreign policy and the counter-measures imposed as a reaction to Western sanctions.

 

Conclusion

After the imposition of Western sanctions, the Kremlin appears to have successfully cushioned its key elites. Russia’s competitive exports provide the existing system with rents necessary to uphold high levels of cohesion, regardless of the economic impact of sanctions. The repression does the rest. Economic securitisation appears to be high on the policy agenda, even if its implementation is inconsequential. The official rhetoric claims that Russia is being threatened by outside powers. Official interpretation of international events leads to the population no longer being able to identify the real target of Western sanctions, which makes their smart nature de facto irrelevant. In conclusion, Western sanctions not only bind the targeted elites closer together, they also foster public rallies in favour of the President who is responsible for Russia’s foreign policy sanctioned by the West, while Moscow’s increasing economic (and political) isolation will make future restrictive measures even more difficult to implement. Sanctions remain an extremely complex foreign policy instrument. And for the most part, the frustration with the topic is justified. Nevertheless, while withdrawing EU sanctions against Russia at this point would only undermine EU’s credibility, weaken its positions in future negotiations, and encourage Russia’s foreign policy adventurism, it is important to understand where and how their actual impact runs contrary to the original goals.

[1] Myers, Steven Lee et al. (2014): Private Bank Fuels Fortunes of Putin’s Inner Circle, in: NYT, https://www.nytimes.com/2014/09/28/world/europe/it-pays-to-be-putins-friend-.html?_r=0 (retrieved 10.03.2017).

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