Monday, February 23, 2015

23/2/15: Russian Sanctions: Round 4 Looming?..

Big change in EU official language marks a major departure from the past diplomatic practice: Let's see if this continues, but at the very least, it lays foundations for renewed pressure on Moscow in relation to Ukrainian conflict.

Both the U.S. (see and the EU (see here: have stepped up pressure for new sanctions.

Here is my take on the prospect of the latter.

Rumours of the U.S. (and by proxy EU) sanctions extension include, once again:

  • Cutting Russian bank's access to SWIFT system (spearheaded in EU by the UK and Poland back in August 2014 and backed by the EU Parliament resolution from September 2014);
  • Widening sanctions against imports of Russian goods and services across broader categories and applying more pressure on the emerging markets (traditionally more important to Russian exporters of industrial machinery and capital goods) to abstain from dealing with Russian suppliers (though it is hard to see what can be added to the current list); and
  • Expanding the lists of Russians banned from travel to the U.S. and Europe (which would be a weak form of response, unless it starts explicitly impacting travel for ordinary Russians - a suggestion that was floated in late 2014 by a number of former U.S. high ranking officials and analysts, with some going as far as suggesting the U.S. should ban all travel for Russian citizens, regardless of circumstances or their residency). In addition, expanding the list of sanctioned individuals to cover members of their families (to allow arrests of their property abroad, especially in those cases where such property ownership is de facto linked to the originally sanctioned officials and business leaders).

All of these proposals, at their extreme, will be firstly painful, but secondly non-reversible in the short- and medium- run.

The latter would signify that any restoration of normal relations between the U.S. (and Europe) and Russia will no longer be feasible even in the medium term and will demonstrably fail President Obama's own test of sanctions as being a tool for influencing short term policies' outcomes without directly adversely impacting ordinary Russians or sacrificing the objective of long-term normalisation.

In financial terms, cutting Russian banks off SWIFT will compound the already significant pressures on Russian corporates and banks, leading to retaliatory measures that will likely see Russian banks and companies suspending repayment and servicing of forex loans to non-affiliated entities based in the U.S. and the EU. This, financially-speaking 'nuclear' retaliation, is feasible given the downgrades of the Russian sovereign debt by Moody's and S&P: the lower the ratings go, the lower is the cost of counter-measures.

In return for this, Western lenders are likely to ask for (and easily receive) court orders to cease Russian assets abroad.

In effect, the worst case scenario here will be an all-out unwinding of Russian economic integration into the Western European and U.S. economies - a process that will make all sanctions irreversible in the medium term. The tail end of this risk is that a more isolated Moscow will face even lower future costs from taking a more aggressive stance in Ukraine or elsewhere. Economic escalation, at this stage, will most likely result in a political escalation along the lines of 'cornering Russia' into retaliation.

But beyond the Russian-U.S./EU theatre of confrontation, there looms another shadow.

In explicitly deploying economic agents and institutions in a geopolitical conflict against a significant global economic player, the U.S. is risking undermining the very foundation of its own economic power and with it, the power of the West. A long-term economic conflict with Russia is putting all emerging markets and non-Western economies on notice: the U.S. markets and institutions can be a high risk counter-parties, controlled and driven by the political considerations. Until now, targeted nature of sanctions has avoided this risk. And until now, SWIFT and its backers in Europe have made a cogent argument that excluding Russia from the system of banks payments clearance risks undermining the system itself. If Russia, in partnership with China, were forced to develop own system of parallel clearance to rival SWIFT, the West will lose control over the financial transactions pipeline that can be monitored and used to combat illicit trade, financing of terrorism and tax evasion. With time, we will also risk losing major transactions flows between other emerging markets and the West, with resultant de-internationalisation of the global financial flows and a reduction in the West's ability to tap emerging markets surplus savings and liquidity to underwrite long-term Western pensions and investment needs.

Similarly, tax evasion has been put on the declining trend by enhanced international cooperation - a process that is now driving the likes of the OECD reforms efforts in corporate taxation. This too will become more difficult to deliver if the global economic systems, largely based on Western institutions, revert toward regionalisation.

As I said, these are tail risks, but they are risks nonetheless.

Furthermore, broadening of sanctions to target explicitly Russian entities and citizens regardless of their affiliation or position vis-a-vis Moscow political regime will have another hefty long-term risk premium. The West is hoping for the sanctions to drive significant economic decline across Russia to effect a regime change, if not in terms of the physical head of Russian state, then in terms of his core policies. However, broadly anti-Russian (as opposed to counter-Kremlin) sanctions are likely to trigger more nationalist revival in Russia and any regime change in such circumstances is likely to lead to an even more bellicose stance from Moscow. Current political opposition within Russia, even theoretically capable of asserting control over power systems in the political and executive systems, is simply much more nationalistic and anti-Western than we, in Europe and the U.S., would like to believe.

None of this should override the consideration of the urgent need to restore peace in and territorial integrity of Ukraine, first and foremost. And, as I said on numerous occasions before, the onus is on Russia to act decisively to make this possible: by forcing the Eastern Ukrainian separatists to implement Minsk accord pro-actively, ahead of the Ukrainian counterparts and with fully verifiable results.

But, in the game of sanctions escalation, longer term losses for both, Russia and the West, will be significant.

It is worth noting that even Mikhail Khodorkovsky - hardly a supporter of the current regime in Moscow - has repeatedly warned against sanctions being deployed as a tool against the ordinary Russians and the Russian economy at large. See here: and here:,-Mikhail-Khodorkovsky-tells-MEPs.

Another prominent - and actually more important in terms of his popularity and position in Russia - opponent of the current Government, Alexey Navalny also called for strongly targeted sanctions that avoid damaging the economy and, thus, increasing nationalist axis power within the country: although Navalny did contradict himself in some later statements (see for example a report here:

Beyond that, there has been significant enough analysts' coverage of the sanctions trap risks - the adverse impact of sanctions on the West's own objectives: the more effective the sanctions are in destabilising Russia, the more they reduce Western capacity to effect change in Russia in the longer run (see here:

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