On August 10, the U.S. extended economic sanctions against additional Russian officials and companies. It is high time to consider the impact of sanctions on Russia over the past year as well as on other countries throughout history.
Russia's Ministry of Foreign Affairs in central Moscow. Photo: RIA Novosti
On August 10, new economic sanctions against Russian officials and companies came into force. Amidst the ongoing sanctions war between Russia and the West, it is important to assess to what extent these sanctions have had an impact on Russia over the past year, as well as to consider the impact of economic sanctions on other countries throughout history.
Economic sanctions of various types have often been used over the past few centuries to discourage wars, to solve disputes and intervene in humanitarian crises. The U.S. alone used trade sanctions in 117 cases just in the period 1972-1998.
But are sanctions effective as a tool of foreign policy?
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To answer that question, it’s first important to consider the different types of sanctions. Among them is the boycott—the voluntary act of stopping communication or business with someone, like excluding Russia from the G8. There are also embargoes, which are trade restrictions that can be partial (as in the case of Russia), or full (as in the blockade of Iran).
The sanctions artillery also includes financial sanctions, which limit the ability of a state or individual to conduct financial operations, and so-called “smart sanctions,” which are intended to target individual representatives of a ruling regime with the purpose of making it change its policies.
In the case of Russia, it took approximately six months and four rounds of sanctions to implement more or less serious measures, which targeted high-ranking officials, important state-owned companies and business moguls with close ties to the Kremlin.
Initially, EU countries were far more reluctant to hurt the Russian economy as hard as the U.S., which can be explained by the fact that EU-Russia bilateral trade ($410 billion) is much bigger than U.S.-Russia trade ($29 billion). However, after the MH17 tragedy inflamed tensions over Ukraine, the EU initiated a tougher stance towards Russia.
In the case of Iran, the U.S. imposed the first sanctions in 1979 and for the following three decades, the U.S. State Department took steps to increase pressure on the Iranian economy. In 2006 the UN Security Council passed resolution 1696, which was followed by seven other resolutions. Combined, these resolutions formed a legal framework for an economic blockade against Iran, which took place in 2012, right after the EU joined this sanctions regime.
How the Russian economy has responded to Western sanctions
In Russia, the effect of sanctions was felt almost immediately, since two highly important energy projects depended on the sophisticated technologies of extraction and the significant experience of European and American partners in shale exploration.
The first one is the Universitetskaya-1 project, a joint venture of Russia’s Rosneft, America’s Exxon Mobil and North Atlantic, a Norwegian daughter company of the British offshore drilling company Seadrill. This project has 13 billion tons of oil and 8.5 trillion cubic meters of gas.
The second one is the Bazhenov formation, a joint venture of France’s Total and Russia’s Lukoil, with its 11 billion tons of oil. This is more than was extracted in Western Siberia during the last 50 years.
The real income of the Russian population fell for the first time in five years: in August and September 2014, people earned on average 1 percent less than in the same period in 2013. Sanctions touched a small group of banks, which altogether control 70 percent of the banking sector in Russia. This, in turn, contributed to the currency crisis. How much will Russian GDP decrease this year? No one knows for sure, but figures range from 1 percent to 5 percent.
We should keep in mind, however, that the bulk of all Russian sanctions belong to the group of “smart sanctions” and cannot be compared with the almost total embargo endured by the Iranian economy (which led to a contraction in Iran’s economy by 5.4 percent from 2011 to 2013 and a rise in unemployment to the 28 percent level).
In Iran, the devastating effect of the sanctions, which were primarily aimed at oil, the top source of income for the regime in Tehran, is clearly visible.
Regarding Russia, sanctions have contributed to the unprecedented fall of the Russian ruble by 50 percent since June 2014. This currency slide still threatens the economic stability of the state. In fact, it gave rise to a recession, which initially cost the Russian economy about 2 percent of GDP. According to recent reports, Russia’s GDP plummeted by 4.6 percent in the second quarter of 2015.
But it’s important to keep in mind that what happens with the ruble is rather a product of the Russian economic development model and the global economic situation.
In January and February of 2014, the ruble fell by 10 percent after the U.S. Federal Reserve System stopped its program of quantitative easing (QE). As a result of QE, large amounts of U.S. dollars were invested in the emerging markets, because these economies were growing faster than the U.S. After the first rumors about plans for stopping the program, money was pulled out by investors. This had negative consequences for national currencies of emerging markets throughout the world.
By June 2014, the ruble had returned to its previous positions, but for the next six months, the currency followed the trajectory of oil. The price of Brent crude fell from $114 per barrel to $62 per barrel. Since the Russian economy is hugely dependent on oil and gas exports, there can be little doubt that a decisive blow was delivered by lower oil prices. These prices, of course, have no direct connection with sanctions.
However, sanctions have limited the ability of major Russian companies and banks to lend and borrow money in the West and added to the risk of capital flight, a traditional problem of the Russian economy.
It wouldn’t be an exaggeration to say that the recession would have started in any case because of huge economic misbalances in Russia. In January 2014, for example, Russian industrial output fell by 0.1 percent without sanctions of any sort. Of course, prices on goods and food have risen, but mostly due to the aforementioned currency crisis.
However, due to the combination of sanctions and worsening economic conditions, the first 8 months after Crimea’s accession resulted in the richest people of Russia losing $62 billion. And that was just in the final eight months of 2014. Taking into account that almost all of them are closely connected to the Kremlin, it would be reasonable to conclude that Putin’s “inner circle” was hurt.
How international sanctions have fared throughout history
Sanctions imposed through international institutions like the UN have a greater effect than ones imposed unilaterally. It explains, in part, why the U.S. failed to organize a full blockade of Russia since the latter is a member of the UN Security Council. However, it is questionable that sanctions can deliver their expected results.
For example, a full economic blockade did nothing to change the Iranian foreign policy and priorities and, even more, helped to radicalize it. As for Russia and Ukraine, the situation is even more difficult and confusing. So, sanctions are hardly likely to change the Kremlin’s foreign policy in Ukraine and resolve the Ukrainian crisis.
Thus, economic sanctions seem to be ineffective in resolving foreign policy challenges, because they don’t help to bring internal conflicts to an end. On the contrary, they can cause a backlash by fuelling the radicalization of the population of the sanctioned countries, due to the serious negative implications on public health and human rights.
Sometimes, sanctions can do more harm than good, like in the case of Congo, when American sanctions on the diamond industry failed to stop a civil war, but caused a major disruption of economic activity in this country.
Back in the 1990s, economic sanctions did little to hurt former Iraqi President Saddam Hussein’s regime, but damaged the country’s middle class and left it at the mercy of the ruling Ba’ath party.
Meanwhile, one possible negative effect of sanctions may be the rise to power of the more radical elements of the country – a possible scenario for Russia, where internal demand for more aggressive foreign policy, in fact, is very high.
The whole idea of coercing a state to accept specific terms is compromised by the fact that most of the sanctioned countries are not well-functioning democracies, in which ruling elites have to take into account the opinions of the governed population. In practice, in non-democratic societies that are subject to economic sanctions, ruling elites have almost no incentives to make changes. On the contrary, they tend to tighten their grip on the economy. This happened in Iran, where giant holding company Sedat, which belongs to Ayatollah Khamenei, controls a number of assets with a combined value about $95 billion.
These assets were easy to obtain because of deteriorating economic conditions inside the country. In any case, it is important to remember that a non-democratic regime may always try to compensate its losses at the expense of its own citizens.
The Cuban regime remained intact after more than 50 years of an economic blockade enforced by the U.S., but the positive developments and changes started only after Washington lifted some restrictions.
However, it doesn’t mean that economic weapons such as sanctions don’t work at all. The fall in oil prices, which happened in large part due to the increase of oil production in the U.S., has placed the Russian economy on the brink of collapse and made the Russian government abandon its plans of federalizing Ukraine.
As a result, exploiting the natural weaknesses of a targeted country’s economy may help to achieve greater results than a full embargo, which has too many negative side effects, most notably in the humanitarian area.
The opinion of the author may not necessarily reflect the position of Russia Direct.