Guest post by Tatiana YugayTatiana Yugay teaches world economy, international economic relations, and economic theory at the Moscow State University of Economics, Russia. You may also interested in visiting her blog "Santatatiana" where she describes her travels in search for Medieval Italy. She has nicely agreed to write this post expressly for this blog.
Obama: "We're united in imposing a cost on Russia for its actions".
When I watched Obama's speech in The Hague against the background of Rembrandt's “The Night Watch”, the medieval characters of the picture seemed more real to me than the speaker. At least, more sober-minded ones. I could not shake out the feeling that I'd been watching a political grotesque, more appropriate decoration for which would be Bosch's paintings. The statement contrasting war in Iraq with the peaceful re-unification of Russia and Crimea is so absurd that I won't even comment on it. (See a thoughtful article by Iskandar Arfaoui. "Double Standards and Hypocrisy: Where are the Sanctions against the West?")
As an economist, I'm more interested in the economic consequences of sanctions for Russia and for the West. As soon as Western leaders threaten Russia with three levels of sanctions, I'll follow their fuzzy logic.
First level: if you live in a glass house, do not throw stones
After weeks of threats, US and EU leaders finally produced their first sanction tool kits. From March 17, the U.S. disclosed two sanctions lists against 27 Russian officials and businessmen and one bank. As the US Treasury stated, “sanctions target Russian government officials, the inner circle that supports them, and the Bank “Rossiya”, the personal bank for officials of the Russian Federation. The measures included the freezing of assets in the USA and the prohibition for Americans to enter into business relationships with those from the sanctions list”.
The EU sanctions were imposed on 33 Russian and Ukrainian officials. In addition, Canada blacklisted 14 Russian citizens and the bank “Rossiya”. In fact, the Canadian list doesn't include any new person. These lists immediately became a target for mockery by the Russian establishment. Both Chambers of the Russian Parliament advised the West to include them all in the list. The Russian State Duma, the lower House of Parliament, has unanimously passed a statement in which they volunteered to be subject to the US and EU sanctions imposed on individual Russian officials and lawmakers. "We suggest that Mr. Obama and EU bureaucrats put all of the Duma deputies who voted for Crimea's accession to Russia and for this resolution on the 'black list' of persons subject to the US and EU sanctions," the statement says.
Those who were included in the black list regarded that fact as a recognition of their great services for the Motherland. Presidential aide Vladislav Surkov admitted ironically that he perceives sanctions as a "political Oscar" from America, a sort of Academy Award for best supporting actor. Deputy Prime Minister Dmitriy Rogozin ironically regards sanctions as a «global recognition” by “the Washington obkom [provincial party committee]” and in a more serious mode expresses the feeling of millions of Russians that "All sanctions do not worth a grain of sand of the Crimean land". Sanctions have already become a part of Russian folklore. The Russians have a lot of fun posting up everywhere comic notices, such as, “Sanctions!!! Forbidden to enter the premises with Obama or his housemates”.
Joking aside, who was really hurt by the current sanctions? Millions of account holder of the bank “Rossiya” had temporary difficulties when the payment systems “Visa” and “MasterCard” suspended its service for plastic cards. President Putin said that he wasn't yet a client of this bank but in order to support the bank he decided to transfer his salary account to the bank. Immediately, many high rank officials and hundreds of common citizens followed his example. So sanctions served as an excellent PR action for the bank. The Bank of Russia promised to exercise further support to the bank “Rossiya” and several affiliated banks.
Another “penalty” inflicted on Russia by the West was an attempt to expel the country from the G8. As Russian FM Lavrov reasonably stated, "the G8 is an informal club. No one hands out membership cards and no one can be kicked out of it... Russia is not clinging to the G8 format, as all major world problems can be discussed at other international venues such as G20”. Finally, instead of Russia's expulsion, the G7 leaders decided to exclude themselves from G8 or “to suspend their participation in the G8 until Russia changes course”. They agreedto hold their own summit this year instead of attending a planned G8 meeting in the Russian Olympic town of Sochi.
However, “the decision to suspend the participation of the seven leading industrial powers in the Group of Eight does not mean the final rejection of the G8 format," Italian Minister of Foreign Affairs Federica Mogherini stated onthe sidelines of the Hague international summit on nuclear security.
Though sanctions didn't really hurt people, Russian stock exchanges began reacting nervously to expected and predicted sanctions. Thus, according to different forecasts capital flight could reach in 2014 from 60-100 to 150 bn dollars. At that, the main international institutions and funds have already lowered their forecasts for economic growth in Russia. In the first (very optimistic) case, the GDP growth in 2014 in Russia will be 1.8%. According to the realistic scenario of 100 bn outflow, a zero growth is expected. The World Bank also predicts a shock scenario when the capital flight can reach 150 bn and the Russian economy would contract by 1.8%.
Invisible sanctions bite
Financial markets react nervously not only to sanctions' expectations but also to undeclared sanctions. The most obvious case is the current activity of the US-based rating agencies, which have speedily downgraded Russia's ratings. Thus, on March 20, the S&P rating agency downgraded Russia's sovereign rating from "stable" to "negative" due “to possible consequences of sanctions by the U.S. and the EU”. On March 21, the Fitch agency downgraded Russia's ratings from "stable" to "negative". On March 29, the International rating agency Moody's Investors Service put the sovereign credit rating of the Russian Federation, which is now at the level of "BAA1", on review for the downgrade prospect.
Recently the rating agencies downgraded ratings of major Russian companies such as “Gazprom", "Russian Railways", "Atomenergoprom", " Lukoil ", " Federal Grid Company of Unified Energy System", "Sukhoi Civil Aircraft", "Federal Passenger Company" and " Gazprom Oil", as well as, cities of Moscow and Saint Petersburg.
These steps were highly predictable, since these rating agencies are based in the USA and were repeatedly suspected to operate to damage Russia. Russia's Deputy Finance Minister Alexei Moiseev statedthat “the downward revision seems to us surprising. Obviously, Russia belongs to a very small group of countries with a current account surplus and about zero budget deficit, I'm not talking about our debt level [which is one of the lowest in the world]. Generally I can not imagine any situation when we might have a problem with solvency”. According to experts, the downgrading is a designed action related to the firm Russian stance on the Crimea. In fact, the economic and financial situation in the country is stable. However, low ratings will make external borrowing more expensive.
By the way, in early 2012, Europe was also discontented with American rating agencies. The EU expressed dissatisfaction with the actions of the international rating agency Standard & Poor's after the revision of a number of eurozone countries. Then, German Foreign Minister Guido Westerwelle expressed a view that Europe should build its own independent rating agencies instead of relying on the U.S. In December 2013, the European Organization for Securities and Financial Markets (ESMA) has warned the "Big Three" of possible sanctions due to errors committed during the crisis. Dissatisfaction of the European regulator was caused by delays in publication of sovereign ratings, possible information leaks and potential conflict of interests. And in February 2014, the Italian Court of Auditors (Corte dei Conti) warned that the big three rating agencies - Standard & Poor's, Moody's Investor Service and Fitch Ratings - can be sued for 234 billion euros. The Court of Auditors believed that rating agencies had improperly understated assessment of the financial capacity of Italy at the height of the debt crisis in 2011, what resulted in damage of hundreds of billions of euros". (The Financial Times)
One further example of invisible penalties has affected more American businesses than Russian ones. On March 1, or long before official sanctioning of Russia, the Bureau of Industry and Security (BIS) under the U.S. Department of Commerce which is responsible for export control, decided to suspend the issuance of licenses for the transfer of American dual-use production to Russia. Almost a month later, the U.S. State Department has imposed restrictions on the sale of military and dual purpose products to Russia. However, these provisions doesn't concern already approved deals. In 2013, the BIS approved a total of 1832 supply contracts with Russia by American manufacturers on various dual-use items that can be used for both civilian and military purposes. The total amount of these agreements reached $1,491 billion. Thus, American producers can lose approximately the same sum of money.
Furthermore, quite unexpectedly, the American side notified Russia of the suspension of cooperation in the fight against drug trafficking. At first, Victor Ivanov, Director of the Russian Drug Control Service, was unreasonably included into the US blacklist. After that, the Acting head of the White House Office of National Policy in the field of drug control Michael Botticelli declined an invitation to visit Moscow. This unfriendly and unmotivated action has undermined the Russian-US cooperation in countering drug trafficking which has resulted in many successful operations against opium laboratories in Afghanistan and cocaine transportation from Latin America to Europe. The Russian agency’s press release says that “Eventually, thoughtful observers and experts can suggest only one possible explanation behind Washington’s arbitrariness – lack of readiness for positive cooperation and fright of responsibility for the 40-fold explosive increase of illegal drug production in Afghanistan since its occupation by the US and NATO forces in 2001”.
One more invisible sanction is designed to punish all Russian citizens of Crimea without exclusion. According to the press service of the European Commission, the European Union banned the issue to Crimean Russian citizens of all kinds of European visas, including Schengen, in embassies and visa centers of EU countries on the territory of the Russian Federation. According to the decision of the European Council, an EU visa will be issued to residents of Crimea only in Ukraine, because (according to Brussels) Crimea is a part of this country. At that, in order to obtain a visa residents of Crimea should contact embassies of EU states in the Ukraine with the passport of a citizen of this country [Ukraine]. Thus, a Crimean Russian citizen can't get an EU visa, by definition. I don't believe that Crimeans would refuse a long-awaited Russian citizenship in exchange for a trip to Europe.
Moreover, the EU once again suspended the talks on visa-free regime for Russian citizens. Fortunately, Italy, the most beautiful European country and favorite travel destination for Russians, remains with the earlier agreements despite the threat of sanctions against Russia from Brussels. On March 24, Italian Ambassador to Russia Cesare Maria Ragaglini announced the start of the process on simplification of visa procedures for Russians, up to providing visas free of charge for participating in events in the framework of the Russian-Italian cross-years on tourism.
PS. At present, Russia os resortinng just to “mirror measures”, namely, reciprocal blacklists. However, the country has a vast arsenal of asymmetric responses which are vividly discussed by politicians, the mass media and general public...
(to be continued)
