Tuesday, March 25, 2014

West's sanctions against Russia so far, and why more will be hard to achieve

This is a two-fer from NPR and Reuters, respectively, that provides very good summary info about Western sanctions so far, and context about individual EU countries, with which many of us are not so familiar.

By Krishnadev Calamur
March 24, 2014 | NPR

President Obama announced new punitive measures last week to expand the initial sanctions on Russia for its moves in Crimea. The measures, along with steps outlined by the European Union, impose asset freezes and travel bans on some Russian officials and target a Russian bank.

Here is what the sanctions do and their possible impact:

What Steps Were Taken?

President Obama signed an executive order on March 17 targeting 11 people, mostly Russian. Then on March 20, he announced that 20 other people and Bank Rossiya were being added to the list.

The action was coordinated with the EU, which initially targeted 21 people and then added 12 to the list.

What Effect Have They Had?

The March 17 announcement imposed travel bans and asset freezes on some Russian officials. Reaction in Moscow wasdismissive. But the measures announced on March 20 appear to have had a greater impact.

Visa and MasterCard briefly stopped processing payments to SMP bank, whose co-owners Boris and Arkady Rotenberg were sanctioned. Bank Rossiya, the country's 19th largest and believed to be close to Russian President Vladimir Putin, was also hit by the credit card companies. In effect, Bank Rossiya can't engage in dollar-based transactions.

This has implications far beyond the U.S. As The Economist notes:

"Western banks, mindful of recent government probes of HSBC and Standard Chartered for breaking similar embargoes, will not want to go near them. For many of the Russians and Ukrainians named this will matter little. For others, such as Gennady Timchenko, the boss of an oil-trading firm called Gunvor that, according to the Treasury department, has links to the Kremlin, the sanctions are likely to hurt."

They have already had an impact. The Wall Street Journal reported last week that "Russian stocks were hit, electronic payments inside the country snarled and energy traders scrambled to assess whether they could still deal with a big Geneva-based trading firm."

The country's finance minister, Anton Siluanov, said the sanctions were "definitely a negative for the general perception of our country's economy."

He added: "Some people say these sanctions won't affect Russia's financial system, but they already are."

Russia is already among the world's worst-performing stock markets this year, its cost of borrowing has increased, and its economic growth is at the lowest since a recession in 2009. Bloomberg reported Monday that the sanctions could push Russia toward a recession. Standard & Poor's and Fitch Ratings both downgraded Russia's credit from stable to negative. They said Western banks are becoming increasingly reluctant to lend to Russia.

As The New York Times reported: "Whatever the political consequences, economists say the uncertainty that now hangs over nearly every profitable enterprise in Russia is what poses the gravest threat to the country's long-term prosperity, rather than any immediate consequence of the specific sanctions."

Why Are They Limited In Scope?

President Obama, who is in Europe this week, was meeting with European allies about the situation in Ukraine.

"We're united in imposing a cost on Russia for its actions so far," he said, shortly after arriving in the Netherlands on Monday. "The growing sanctions would bring significant consequences to the Russian economy."

As Mark reports over at our Two-Way blog, Obama and his counterparts from six other major nations announced that they will suspend their participation in the G-8, and meet instead in Brussels.

But one reason sanctions haven't been stronger is Europe's dependence on energy from Russia, one of the world's largest energy exporters.

As James M. Lindsay of the Council on Foreign Relations wrote:

"Sanctions have the biggest bite when other major economies sign on. Without followers, the target country simply looks elsewhere for goods and investments. Whether Europe will sign up to tough sanctions, though, remains to be seen. While the region is unified in denouncing Crimea's annexation, nations are split over who should bear the costs of punishing Moscow. France and Great Britain, for instance, are bickering over whether Paris should give up its arms sales to Moscow and whether London should sacrifice profits from servicing Russian oligarchs."

The West has been more effective when it coordinates action. For instance, in 2011, in response to Iran's nuclear program, the U.S.announced it was targeting the Islamic republic's oil revenue and its central bank. The EU followed suit. Iran's economy suffered, and it eventually agreed to multilateral talks over its nuclear program.

Similar actions could stop Russia from making similar moves in other parts of its neighborhood — but they may also have another consequence: As the Council on Foreign Relations' Lindsay notes, if "Moscow is forced to pay the maximum price for its transgressions, it might decide to seek the maximum gain."


By Christian Lowe and Robert Muller
March 24, 2014 | Reuters

The European Union states that used to be behind the Iron Curtain have most to fear from Russian aggression, yet also most to lose from imposing sanctions, and for now the fear of losing money is winning out.

Messages over the past week from officials in the EU's 11 ex-Communist member countries indicate that most of them are going to be very resistant to any attempt by the bloc to impose the next stage of sanctions, on trade and economic ties.

The EU's ex-Communist camp, on the face of it, should be a natural backer of tough action: they have been occupied by Russia in the past and, after Moscow's annexation of Crimea, many of them have reason to fear they could be next in line.

If even this group is shying away from tougher sanctions on Russia - with the exception of Poland and a couple of others - it shows how hard it will be for the EU's sanctions hawks to win a consensus from all 28 member states.

Officials in most ex-Communist states said their main preoccupation was not any security threat but keeping their fragile economic recoveries on track, something that would be jeopardized if they had to forfeit trade with Russia, visits from Russian tourists, and shipments of Russian gas.

"When one quarter of (our) cars, about 250,000, go the Russian Federation, what would be the impact (of sanctions) on the car industry? Catastrophic," Prime Minister Robert Fico of Slovakia, a big automaker, told reporters last week.

"Why should we make decisions now which would endanger our economy and our people?"


Poland, the region's biggest economy, advocates a tougher stance, pushing hard at meetings in Brussels for a third stage of sanctions, beyond the assets freezes, visa bans, and suspension of cooperation talks that the EU has already adopted.

Polish officials say Russian President Vladimir Putin's ambition is to establish control over other parts of Ukraine beyond Crimea, and economic sanctions are a vital deterrent.

Reuters this week was shown a copy of what appeared to be a ballot paper asking people in Ukraine's eastern Donetsk region if they wanted it to be incorporated into Russia - the same scenario that was played out in Crimea.

Among Poland's eastern European peers, Romania shares its view on sanctions, as does the Baltic state of Estonia.

"We are prepared to support the strongest possible measures," Estonian defense minister Urmas Reinsalu told journalists on Friday. "The Putin narrative poses a threat to the security of all Europe, including Estonia."

Yet even the firmest supporters of a third phase of sanctions concede that it will be tough to win a consensus. "We'll have to see what happens," said one European official, from a country that wants economic sanctions.


The anxiety in eastern Europe about sanctions is a measure of how intertwined its economies still are with Russia, more than 20 years after the Warsaw Pact ceased to exist. The dependence goes beyond the need for Russian fuel.

In the Czech capital, Prague, Russian-speaking tourists weighed down with shopping bags promenade around Wenceslas Square, and cluster around kiosks that offer bus excursions with commentary in Russian. The Czech Chamber of Commerce estimates that strict economic sanctions would cost up to 50,000 jobs.

The Czech government does not want to anger big European powers like Germany by blocking economic sanctions. But equally, this "is not anything we want to push for," said a Czech official with knowledge of discussions within the EU. "It will have a negative impact on our economy."

For many in the region, the past two decades have been about setting aside traumatic memories of Soviet occupation, and focusing instead on making a good living - an attitude that helps explain the approach to Russia now.

Bulgaria, the economy most dependent on Russia, has said it is opposed to tougher sanctions. In Slovenia, officials say they too are not keen.

In Hungary, the government has just signed a deal with Russia to expand its Paks nuclear power plant. Russia is its biggest non-EU trade partner.

At a news conference in Budapest last week, visiting German Foreign Minister Frank-Walter Steinmeier, a backer of tough sanctions, winced as his Hungarian counterpart Janos Martonyi, sitting next to him, outlined how vulnerable his country was to the impact of sanctions.

A Hungarian official, speaking on condition of anonymity, said a third stage of sanctions would "entail very painful and consequential decisions for both sides." That did not mean they would not happen, said the official, but "at this stage several EU member states would be interested in avoiding stage three."

Though Baltic state Lithuania is traditionally hawkish on Russia, President Dalia Grybauskaite said this week it was not yet time to adopt wide-ranging sanctions.

Nerijus Maciulis, chief economist at Swedbank Lithuania, said gross domestic product could shrink 10-15 percent if the strictest sanctions are imposed, tipping the country into renewed recession.

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