IPOCAMPUS

International Business Agency

Publication 2

Pubblication 2  Ipocampus

 

CRISIS IN UKRAINE

WILL SANCTIONS HAVE ECONOMIC IMPACT ON RUSSIA?

 

Exclusive: Mr Odoni, Ipocampus Holding Odoni Partner, reveals how to put a dent in Moscow's economy.

My short answer: Nothing of significance will create a dent in Russia’s economy.

Think about it this way:

  • Suspending Russia from the G8 Summit and placing a visa ban against Russian politicians are merely symbolic gestures and do not seem to affect Russia in any symbolic way.
  • Even the sanctions on trade will not cause much harm (as only 2 percent of Russia’s exports got to the U.S. and mostly includes petroleum products, and only 5 percent of total imports from U.S., including vehicles, agricultural products, chemical products and civilian aircrafts, etc). They can always procure them from other countries.
  • Russia can survive by forging a close alliance with China. They are not allies the way the U.S. and European Union are, mainly because Russia expects China to have a go at Russia’s Far East at some stage. However, tactical needs for survival can trump the strategic concerns. That can result in close and truly cooperative alliance of China, Russia, Kazakhstan, perhaps Mongolia, some others, with China building high-speed railways all the way to Sevastopol. Russia can also ignore concerns about Iran and throw its support behind Iran’s Shiite corridor all the way to Lebanon. Overall, it can do a lot of things the U.S. doesn’t want it to do. Of course, some Ukrainian nationalists would want the U.S. to endure significant costs and losses to get them back Crimea, which they lost through corruption and sheer nationalistic stupidity. However, U.S. politicians are elected to advance U.S. interests, so any objective observer would expect them to stop posturing the moment the public lost any interest and get on with their primary job. While they can decide that applying even more severe sanctions is, in fact, in U.S. interests, I seriously doubt that.

Some of the options available that might put a dent in Russia’s economy include:

  • Freezing Russian assets in the U.S. But, Russia’s financial institutions are barely involved in the U.S. (At the end of 2013, Russia had $750 billion in Russian banks and only $20.2 billion in U.S. banks.
  • Selling $56 billion worth of Russian-issued stocks by the U.S., but considering Russia’s $870 billion market capitalization, the impact would be minimal. And it would also hurt some of the American companies that hold them.
  • Playing the currency market: Unlikely to have drastic results in here, too. The Russian Central Bank can respond by spending billions of dollars of its foreign currency reserves to purchase the ruble and stabilize the currency, and the Russians have substantial amount of money in this regard.
  • Forbidding major U.S. firms such as Exxon Mobil, Boeing, Coca-Cola, General Motors, etc., from doing business with Russia. This would also backfire in a major way as Exxon Mobil has a huge presence in Russia. Along with Rosneft, Exxon has invested significantly in the exploration of the Black Sea and the establishment of a liquefied natural gas facility at Vladivostok. These two projects alone are worth at least $80 billion. Rosneft also has major stakes in various North American projects, which helps it to develop various new technologies. As for Boeing, Russia is the major supplier for Boeing and the company plans to increase its investments in the Russian market from $9 to $27 billion by 2021. The Russian airlines have already ordered about 100 planes. And if it’s considered, U.S. energy companies and military firms would strongly oppose the sanctions.
  • The main lever against Russia is oil prices: Reducing them by 10 percent (which is not really sanctions) will wreak havoc on the Russian budget. Even European natural gas contracts are tied to oil prices. The U.S. can surely make some moves alone, but it needs to make sure that the Saudis do not counteract those moves. Also, keep in mind that the Russian stock market and currency lost a lot of value. This process does not depend on sanctions but continues as foreign money is pulled out and new investment is frozen. I guess the logic is to see where this process stops and then potentially add sanctions to keep it going. As for Russia planning to supply oil and gas to China and India to replace the European market, this is easier said than done. China is very far, India cannot be supplied by pipelines, and Russia does not have oil supertankers or LNG vessels. Moreover, China and India already get a lot of energy carriers from other sources, so they cannot be forced to pay huge prices like Poland and Ukraine. The EU can in theory supply gas to Poland and Ukraine. They just need to upgrade the pipelines. The EU can also increase gas imports from Africa.

What about European firms? Can they do anything?

Well for a start, the European Union accounts for almost half of Russia’s total trade.

  • The British own up to 20 percent of Rosneft.
  • France has made significant investments in Russia’s military sector.
  • Germany spends almost $41 billion on natural gas every year.

The fact is, the EU is the primary consumer of Russian energy. But those countries are also increasingly interdependent. So neither side is willing to accept the delicate balance. And the EU member states are still dealing with the financial recession, so being involved in a sanction against their third largest trade partner will only add to their economic stress.

What’s the bottom line? At the rate we are going, U.S./EU sanctions against Russia will not be of much significance. Just like with South Ossetia a few years ago, where Russian troops are still stationed to this day, this is all about show and saving face. In effect, the greatest risk to the U.S. is in overreacting, and the best course is strategic alliances.

So what to do?

I see only two ways for sanctions to be successful.

1) For starters, I believe the U.S. needs the EU’s full cooperation if it needs to achieve anything of significance – and the key is Germany. Berlin supported the uprising in Ukraine and has on occasion opposed the Russian response, but it is not in a position to do anything more concrete. So far, it has tried to straddle the divides, particularly between Russia and the European Union, wanting to be as one with all. If Germany effectively ignores Russia, Berlin will face two problems. The first will be that the Eastern Europeans, particularly the Poles, will lose massive confidence in Germany as a NATO ally, particularly if there are problems in the Baltics. Second, it will have to face the extraordinary foreign policy divide in Europe. Those countries close to the buffers are extremely uneasy. Those farther away – Spain, for instance – are far calmer. Europe is not united, and Germany needs a united Europe. The shape of Europe will be determined in part by Germany’s response.

2) Obama needs to show real resolve and leadership – unlike the total lack of it shown when dealing with the minion Bashar Assad of Syria. Having chosen to support the creation of an anti-Russian regime in Ukraine, the United States now faces consequences and decisions. The issue is not deployments of major forces, but providing the Central Europeans from Poland to Romania with the technology and equipment to discourage Russia from dangerous adventures – and to convince their publics that they are not alone. It is far-fetched to think that the Russians would move beyond commercial activity in this region. It is equally far-fetched that the EU or NATO’s expansion into Ukraine would threaten Russian national security. Yet history is filled with far-fetched occurrences that, in retrospect, are obvious. The Russians have less room to maneuver, but everything is at stake. They might, therefore, take risks that others, not feeling the pressure the Russians feel, would avoid. Again, it is a question of planning for the worst and hoping for the best.

Ideally, the Germans would join the project, but Germany is closer to Russia, and the  plan involves risks Berlin will likely want to avoid. There is a grouping in the region called the Visegrad battlegroup. It is within the framework of NATO and consists of Poland, the Czech Republic, Slovakia and Hungary. It is now more a concept than a military. However, with U.S. commitment and the inclusion of Romania, it could become a low-cost (to the United States) balance to a Russia suddenly feeling insecure and, therefore, unpredictable. This, and countering Russian commercial imperialism with a U.S. alternative at a time when Europe is hardly in a position to sustain the economies in these countries, would be logical.

This has been the U.S. strategy since 1939: maximum military and economic aid with minimal military involvement. The Cold War ended far better than the wars the Americans became directly involved in. The Cold War in Europe never turned hot. Logic has it that at some point the United States will adopt this strategy. Of course, in the meantime, we wait for Russia’s next move or, should none come, a very different Russia.


Mr Odoni is President and CEO of Ipocampus Holding Odoni Partner, Dubai based.


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