The Fuse

Russian Sanctions Are Not Working

by Matt Piotrowski | October 16, 2015

Sanctions on Russia’s energy and financial sectors have no doubt isolated Russia from Western countries, but they have not changed President Putin’s overall strategic vision.

It’s been more than 18 months since the U.S. and EU slapped the first round of sanctions on Moscow in an attempt to stop Russia’s involvement in Ukraine, but progress has been limited. Russia’s economy is expected to fall by close to 4 percent this year, and there has been a ceasefire that has curbed violence in eastern Ukraine, yet it’s unclear if these developments are fully the result of the EU and U.S. measures, or other factors. The low oil price, for instance, along with a weakened ruble and rising inflation, is having a dramatic impact on the Russian economy.

Sanctions on the country’s energy and financial sectors have no doubt isolated Russia from Western countries, but they have not changed President Putin’s overall strategic vision. Although violence has ebbed in eastern Ukraine, ceasefire violations have occurred, and the region is still vulnerable to more eruptions. Moscow has realized it can achieve its goals in Ukraine through political clout rather than military force. Meanwhile, Moscow has shifted its attention for the time being to military strikes in Syria, undermining claims that sanctions are dampening its military strategy.

“The situation now appears to be slowly drifting toward a frozen conflict,” write Richard Nephew, a former member of the U.S. negotiating team with Iran and Director for Iran at the National Security Council, and Simond de Galbert of the Center for Strategic and International Studies (CSIS) in The National Interest.

“The situation now appears to be slowly drifting toward a frozen conflict.”

Western powers implemented three rounds of sanctions in 2014 in response to Russia invading Ukraine and annexing Crimea, a Ukrainian territory with strong Russian ties. Russian sanctions targeted both individuals and companies, with the financial sector and long-term investment in energy projects hit the most. Sanctions have, for the most part, added more economic insecurity to a country that has been dealing with structural weakness, and they have impacted company-level operations, but they have not forced Russia to give up its ambitions in eastern Ukraine.

Since sanctions have only been marginally successful, Western governments would have to tighten them significantly in order to get more compromises out of Moscow. New sanctions to increase pressure on Putin are under consideration, with cutting off crude exports one possibility.

“The question for Europe and the United States then becomes whether and how to turn up the pressure on Moscow to create the conditions for a long-term, amicable resolution to the crisis,” write Nephew and de Galbert. “Some of this pressure will need to be political in nature, and some of it will need to come from expanded sanctions.”

Tightening current measures is more likely than a new round of sanctions outcome given Europe’s dependence on Russia for trade, particularly in oil and gas. Sanctions that cut off Russia’s oil or gas exports would hurt Europe as much as it would Moscow. In 2014, some 30 percent of Europe’s crude and natural gas came from Russia. Moscow is highly dependent upon Europe, shipping 70 percent of its crude exports and 90 percent of its gas exports to European countries. But Europe’s energy security would be sorely compromised by ratcheting up sanctions to cut oil and gas trade, so this option will not likely go forth, despite the damage it could inflict on the Kremlin.

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It is important to note that sanctions have a poor track record in prompting countries to succumb to demands. Sanctions against Iran, which are much stronger than those against Russia and have been considered successful, did not get Tehran to capitulate. Instead, they brought Iran to the negotiating table where Tehran accepted compromises on the country’s nuclear ambitions, which have been delayed, but not completely shelved, by the deal agreed in July.

Even Nephew and de Galbert note the limitations of sanctions: “We believe that it is unlikely that sanctions alone will force Moscow to stop sponsoring rebel and separatist groups in eastern Ukraine or renounce a direct hand in influencing Ukraine’s future.”

In oil and gas, the impact is longer term

While sanctions against the country’s financial sector have caused brain drain and capital flight, experts are pointing to low oil prices rather than a direct sanctions impact. The International Monetary Fund (IMF) sees Russia’s economy contracting by 3.8 percent this year, versus growth of 0.6 percent last year. That decline is at least partially attributed to lower energy prices. The IMF estimates that the weaker price environments for oil and gas will subtract 2.25 percentage points from GDP annually over the 2015-17 period. Despite this drag, GDP is forecast to rebound next year, rising to 0.6 percent, a sign that the economy should stabilize and Moscow may be able to ride out the impact of sanctions for the time being.

The impact in the energy sector is solely on long-term investment. Russia has clearly been unaffected in the short run.

The impact in the energy sector is solely on long-term investment. Russia has clearly been unaffected in the short run. When sanctions were first implemented, IEA anticipated a drop-off in production within the year. However, the country recently hit a post-Soviet record in oil production, with output reaching 10.7 million barrels per day in September. Meanwhile, recent strikes against Syria—where the U.S., Saudi Arabia and Iran all have a lot at stake in the outcome—have emboldened President Vladimir Putin, making Russia a global player again. Putin will now be a vital voice in any political solution that emerges in the region.

Because the EU would be adversely affected by tougher sanctions as a result of its large amount of trade with Russia, the 28-member union implemented weak sanctions and didn’t include any provisions against gas equipment, which is largely interchangeable with oil. The EU’s sanctions lacked teeth and were mostly symbolic.

The biggest effect in the energy sector, if any, will be felt in 5 to 10 years, as sanctions are choking off technology and expertise in deepwater, Arctic offshore and shale.

The biggest effect in the energy sector, if any, will be felt in 5 to 10 years, as sanctions are choking off technology and expertise in deepwater, Arctic offshore and shale. The biggest energy measures inhibit U.S. companies from selling goods or services to Russian energy companies to develop in these areas. The Russian firms affected are Gazprom, Gazprom Neft, Lukoil, Surgutneftegas, and Rosneft. As a result of sanctions, which have forced companies such as Exxon, Eni, Statoil, BP and Shell to abandon capital-intensive projects with Russian firms, almost all activity by Western companies in Artic offshore and shale projects has been halted. Without Western involvement, Russia will not reach its potential and the effects could be disastrous for the country, but again, this situation has no effect on current conventional crude operations. Against this backdrop, current measures are too weak in getting Putin to change his strategy toward Ukraine, and therefore the frothy relationship Moscow has with the U.S. and EU countries will persist.