The West and Russia: a tit for tat game, part II

 By Tatiana Yugay 

In this post, Tatiana Yugay, Professor at the Moscow State University of Economics, Russia gives us some background to the recent events relative to the crisis in Ukraine. Image © Collage: Voice of Russia

I wrote earlier on about the first level of sanctions against Russia imposed on individual businessmen. At present, “All Quiet on the Western Front” (Im Westen nichts Neues) but it seems to be a brief lull before the storm (note by UB: this sentence was written a few days ago and it seems to have been prophetic). The main geopolitical actors are staying in full alert anticipating further steps of each other. After a certain agitation caused by launching of the first sanctions tool kit, the West is watching Russia's reaction (a disappointing one) and making guesswork about Putin's next move. Now it is more or less clear that the West and the Ukraine have accepted Crimea’s integration with Russia. It seems that they are going to continue with sanctions only in case of a Russian invasion of mainland Ukraine, which is highly improbable.

Second sanctions' level: Trying hard to avoid the boomerang effect

The main reason behind the pause taken by the West is the understanding that after undertaking clearly political individual sanctions the law of consequences demands more comprehensive economic sanctions to be imposed on the most sensible sectors of the Russian economy. The conflict of mighty economic interests serves as a watershed between the U.S. and the EU, which separates them in the form of no less than the Atlantic Ocean.

As for the U.S., sanctioning is their favorite game. At present, the U.S. has been imposing at least 24 different sanction regimes on different countries from the Balkans to Zimbabwe. Moreover, last week Washington gave a strong warning to China not to escalate territorial tensions in the Asia-Pacific region if it doesn’t want to face American retaliation. In his statement, a US official used sanctions on Russia over Crimea’s accession as an example. However, politicians and analysts express strong doubts about sanctions' efficiency. Even a rather hawkish Paul Pillar writes in his post “More Sanctioning Madness”: “The sanctions habit has persisted because imposing sanctions is a primitive, easy way to “do something” about difficult problems on which there is an urge to do something. It is a gesture. Congress needs to decide whether gestures are more important than making progress in getting out of the current crisis”.

In fact, there are very limited trade relations between Russia and the USA and therefore economic sanctions can't cause much harm to the Russian economy. According to the Federal Customs Service, Russia's trade turnover with the U.S. in 2013 was less than $28 billion, or 3.8% of Russia's foreign trade. Russian exports to the US accounted for $11.2 billion while imports were $16.5 bn, so the balance is more favorable for the U.S. than for Russia. 
 

Last week, NATO and NASA created a rather comic duo by declaring demonstratively that they want to sanction Russia, too. The fact is that Russia has very limited relations with both organizations. NASA posted on its Twitter and Facebook accounts a statement announcing the suspension of cooperation with Russia. NASA’s status on Facebook stated: “Given Russia's ongoing violation of Ukraine's sovereignty and territorial integrity, NASA is suspending the majority of its ongoing engagements with the Russian Federation.” I was rather surprised by this bold declaration and even thought that NASA'a accounts had been hacked. Ironically, exactly at this same period NASA’s astronaut Steven Swanson has been staying at the International Space Station together with two Russian astronauts Aleksandr Skvortsov and Oleg Artemyev. It isn't very reasonable to turn a US citizen into a hostage of the Ukranian crisis. I tried to imagine possible ways out of this awkward situation. I could think of only two opportunities: Swanson could be deported from the station to extra vehicular activity (EVA) or, quite the contrary, would be granted Russian citizenship. Luckily for the US astronaut, his chiefs had specified a little bit later that they wouldn't suspend the ISS cooperation. As Deputy Prime Minister Dmitriy Rogozin wrote in his tweet, “NASA suspends cooperation with Roscosmos (Russian Federal Space Agency) with the exception of work on the ISS. Yet, apart from the ISS we didn't cooperate with NASA in any other way”. As a matter of fact, NASA's pompous declaration appeared to be much ado about nothing. George Abbey, former director of the Johnson Space Center, said in his interview to “Russia Today” that “the United States right now are totally dependent on our Russian partners. When we stopped flying the space shuttle, we did away with our access to take humans to space and we rely completely upon Russia. Russia does a very good job flying our crewmen up to the space station, so if that were to end, the US human flight program would not really be implemented in any fashion until 2017 or much later”. 
 
OK, what about NATO's demarche? Maybe it represents a real threat to Russia's national security? Actually, the only field where NATO and Russia have been fruitfully cooperating is Afghanistan. However, as I wrote in my previous post, NATO had already declared that it had unilaterally suspended all cooperation with Russia on drug trafficking. This display of political muscles takes place precisely at the time when NATO is preparing to conclude the withdrawal of the last 50 thousand troops from Afghanistan. The infamous retreat of NATO's forces will take place this summer and the Command of International Forces will be badly in need of Russia's assistance, namely, in providing transit services for troops withdrawal. At that, NATO hurried to precise that it didn't mean suspending the cooperation on Afghanistan.

On April 1st, the NATO issued a communiqué where it declared that it would restrict the access for Russian diplomats in its headquarters. A very good April Fool's joke, indeed! And what if Russia retaliates by forbidding access to the "northern corridor" for the transit of NATO's troops through its territory?! In this case, the international troops would be forced to march through Pakistan, which is much more dangerous because of the activity of the Pakistani Taliban in the country's northern provinces. Big groups of vehicles carrying military personnel and cargo could become an easy target for ambushes, terrorist and mine attacks. Thus, uncontested withdrawal of troops through Pakistan would be fraught with greater losses of manpower and military equipment.

Unlike their NASA's and NATO's colleagues, Russian officials seem to be maintaining a more mature position. Russia's Roscosmos space agency is not preparing to retaliate against NASA in connection with the latter's imposition of sanctions. Deputy head of Roskosmos Denis Lyskov said, "All the projects that have significance for Roscosmos are running in international format in the first place. NASA sanctions do not apply to them," he reiterated. The International Space Station is not a bilateral program, although the USA and Russia are among the key participants. "Suspending work within the framework of this program would result in serious consequences for everybody," Lyskov said.

Russian Foreign Ministry Lavrov regards NATO's decision to limit the access for Russian diplomats to its headquarters in Brussels as reflecting the persistent "Cold War" mentality among the alliance's officials. "We noted that information about the move was posted on the main page of NATO's official website. It looks like access by Russian diplomats to the NATO office is the North Atlantic alliance's number one problem," the Russian Foreign Ministry said in a statement.

In the best traditions of political farce, US senators Dan Coats and Mark Kirk sent a letter to FIFA requesting the international governing organization for soccer to strip Russia from its right to host the World Cup in 2018 and also ban it from this year's edition of the event which will be hosted by Brazil. FIFA Secretary General Jerome Valcke explained US lawmakers in his response letter that FIFA rules and regulations do not apply to a "entities outside the pyramidal structure of the game of football". He added that individual teams could not be banned from a competition because of actions by their parent states.

Deputy Foreign Minister Sergey Ryabkov, commenting on US, NATO's and NASA'sfeverish activity to threaten Russia with sanctions, gave them a very helpful recommendation. “What can we advise our American colleagues to do? Spend more time outdoors, do some yoga, have healthy food, probably, watch more comedy series on TV. That would be better than working yourselves and others up, knowing that the train has already departed and that no tantrums, crying and hysterics can help”.

Meanwhile, the American public gives little support to USA's engagement in Ukraine. According to a new Reason-Rupe poll, 58 percent of the 1,003 respondents said they do not want America to be involved in the crisis whatsoever–not economic sanctions, not military action. This may be indicative of weariness about adding a new chapter to America's legacy of international entanglements. Only eight percent of respondents considered sending military troops and assets to be the right course of action for America; and only thirty-one percent think the U.S. should continue imposing economic sanctions on Russia. "If Russia attempts to invade additional parts of Ukraine, would you favor or oppose [sending US troops to Ukraine]?" non-interventionist sentiments remained high. Sixty-two percent of people polled would still be opposed to sending military aid and weapons. Though, when asked a similar question about stricter sanctions, 61 percent said they would approve.

The discord in the European communal home

Obama's tour was dedicated to rally the international community in order to isolate Russia, but the European leaders are reluctant to punish themselves together with Russia. It isn't at all surprising since, unlike the U.S., the European Union has developed very strong economic ties with Russia. The EU trade turnover with Russia stands at almost $410 billion euros, or nearly 15 times more than the Russia-US trade turnover. According to the Eurostat, Russia is the EU's third most important trading partner, behind the USA and China and accounts for 7 percent of imports and 12 percent of exports of the EU. The introduction of sanctions may lead to a considerable financial losses for the EU while the region is slowly coming out from the Great Recession.

On the aftermath of the EU summit on March 20th and 21st, European Commission President Jose Manuel Barroso told that the European Union has not yet made a decision on possible practical trade and economic sanctions against Russia. He said the European Commission (EC) was considering all economic sectors, but had not reached an agreement on the specific economic measures against Russia; and the timeframe for the coordination of these measures had not been specified. Many European countries opposed trade war with Russia during the EU summit on March 20th and 21st. "Escalating the conflict around Ukraine would have catastrophic consequences both for the parties to the conflict and Europeans", Belgian Prime Minister Elio Di Rupo said.

There isn't even accord among the EU's main stakeholders. Angela Merkel, the Chancellor of Germany, made strong political statements, threatening Russia with "massive political and economic damage". At the same time Merkel also believes that the West “has not reached a stage that requires the imposition of economic sanctions” against Russia, as advocated by US President Barack Obama. “And I hope we will be able to avoid it,” she said. Germany is very much involved in economic relations with Russia with trade turnover about 76 billion euros in 2013. The imposition of sanctions has been strongly opposed by German businesses. More than 6,000 German firms and over 300,000 jobs are dependent on Russian partners with the overall investment volume of 20 billion euros. In addition, Germany heavily relies on Russian energy with around 35 percent of its natural gas imports coming from Russia.

The discord between the EU members is based on their unwillingless to hit Russia's sector of economy which is more connected with their own economy. Thus, Britain and France have exchanged unpleasantries over the fact that Paris was not strict enough in regard to Moscow as it had not refused to sale helicopter carriers to Russia. In its turn, London was unable to show the French an example and freeze multibillion assets of Russian businessmen.

A hint made by French FM Laurent Fabius that Paris may give up the contract for building Mistral-class amphibious assault ships for Russia as part of the western countries' economic sanctions against the Russia, caused a strong discontent in France. Apart from damaging 600 workers occupied in the manufacturing, the collapse of the deal can negatively affect the financial soundness of DCNS (Direction des Constructions Navales). According to Le Figaro, Moscow has already paid 1.2 billion euros to Paris, or more than a half of the contract sum. If breach of contract is also included in the economic sanctions package against Russia, France will have to pay the break fee. Russian Deputy Defense Minister Yury Borisov said, "Of course, Russia will defend its right to the end in accordance with the agreements concluded and will demand repayment of all damages we could sustain in the case that the Mistral contract is broken off".

The best kept secret about these Mistrals is in the fact that ahead of concluding the contract in 2011, there were hot debates in the Russian defense sphere about appropriateness of commissioning these vessels abroad whereas the national defense industry was quite capable to build aircraft carriers on its own. The Russian United Shipbuilding Corporation (USC) has already noticed that it would finish building the ships in case of cancellation of the contract, taking into account that the USC had already received the most part of the technical documentation on the "Mistral" from the French shipbuilder. French President Francois Hollande hurried to declare that France will continue implementing the contract on supplying the two Mistral vessels to Russia. France is complying with the conditions of the agreement signed, the parties are not at a stage of dissolving the contract and it is hoped that this will be avoid. This little story with happy end illustrates how the boomerang effect works.

Not only the big European economies express their concern but also the smaller ones. Latvia has so far voiced the biggest concern over sanctions against Russia, as the adverse effect would hit it the hardest compared to all the EU member states. The country could lose up to 10 percent of its GDP, as the action against Russia could have a big adverse effect, according to the country’s Prime Minister Laimdota Straujuma. Latvia also said that the EU should compensate any countries hurt by sanctions against Russia.

A boomerang never misses to hit back

The European leaders are seeking how to punish Russia and at the same time not to hit their own economies. In fact, Russia shouldn't work very hard in order to retaliate against its European counterparts. As a prominent US trader Jim Sinclair ironically said, slapping of sanctions on Russia is tantamount to shooting oneself in the foot. On a more serious tune, Euro MP Pino Arlacchi admitted, “The EU sanctions against Russia would cripple the European economy instead. The position of the European Union should be different from the US position. Europe should not insist on the extension of sanctions. These sanctions are unwise. In fact, they are directed against us".

The most vulnerable point in the EU-Russian relations is Europe's energy security. Russia is currently the world’s largest crude producer and ­second-largest gas producer. In 2012, the European Union’s bill for Russian oil and gas amounted to $156.5 billion, says the International Trade Centre’s Trade Map. European members of the Paris-based International Energy Agency imported 32% of their raw crude oil, fuels and gas-based industrial feedstocks from Russia that same year. According to the U.S. Energy Department in Washington, collectively, the EU, Turkey, Norway, Switzerland and the Balkan countries got 30% of the natural gas they burned from Russia last year. The EU as a whole accounts for about one-third of Russia’s exports, 40 percent of which pass through Ukraine.

The picture bellow clearly shows the dependence of individual EU countries on Russian gas, varying from zero in case of the UK and to 100% (Finland, Lituania, Latviya, Estonia). In the case of Italy, which depends for 90 percent on imports for its gas needs; 29% of the supplies come from Russia, which is the biggest.

I'm not a fan of The Economist's biased attitude towards Russia but as an economist I'm fond of maps, tables and charts etc. So I highly recommend to read an article with an eloquent title “Reducing Europe’s dependence on Russian gas is possible—but it will take time, money and sustained political will“. The author studies the case of high indebtedness of Ukraine to Russia's energy company Gazprom. “Ukraine already owes Gazprom $1.7 billion, according to Mr Miller. If Ukraine continues failing to pay its bills—and without outside help, it can't pay—Gazprom can cut it off. Such a dispute need not, in principle, have any effect on the gas that flows through Ukraine to other countries farther west. But if Gazprom reduces the flow of gas to reflect the fact that Ukraine no longer has a right to its 28bcm, and Ukraine takes some of that gas anyway, or if Gazprom shuts down the pipelines going through Ukraine completely, Europe’s supplies get hit. Europe gets 24% of its gas from Russia, and half of that—80bcm a year—passes through Ukraine”.

I'd like to admit that The Economist doesn't consider EU sanctions or Russia's retaliation but only a possibility of suspending gas supplies to Ukraine. The article examins different opportunities, such as gas sharing among the EU consumers, Norwegian exports, American shale gas, imports of LNG from the Middle East and even... Russian supplies via the Nord Stream. Finally, The Economist makes a rather ambivalent conclusion, “Though making a real dent in Europe’s reliance on Russian gas will take political will, money and the best part of a decade, merely moving in that direction will shift the balance of power, because it will signal a fundamental truth: in the end, the Kremlin needs its European customers at least as much as they need Russian imports”.

According to US-based financial research company Sanford C. Bernstein & Co, Europe will have to spend up to $215 billion through investments if it decides to stop buying Russian natural gas. The company considered "various scenarios of Europe refusing Russian gas supplies but none of them seem attractive" and arrived at conclusion that "the cure is worse than the illness".

Danny Vinik reasonably writes in “New Republic”, “the EU can impose its own sanctions against Russian individuals and entities. They will carry much more force than anything the U.S. does, because the EU does more than $400 billion of trade with Russia each year. This is a double-edged sword, though. For instance, if the EU prohibits Eurozone businesses from purchasing Russian natural gas and oil, it would significantly impact the Kremlin’s finances. But it would also leave the Eurozone nations without a vital energy supply, increasing the price of gas and oil and potentially leading to shortages. That's made countries like Germany hesitant to support sanctions".

An American cure from the Russian gas addiction

When I first heard an interview by Giulietto Chiesa, (http://youtu.be/GxeLAAyue_k) who said that all the Ukranian crisis was inspired by the U.S. in order to sell shale gas to Europe, I decided that the whole idea was a little bit exaggerated. Being a follower of Ugo Bardi's blog, I know that the American shale revolution is well over. You can imagine my surprise when Obama in his Hague speech declared the shale gas as a panacea from Europe's dependence on Russian gas. I asked Ugo to comment on this sensational statement. As I expected, he called the American idea to sell gas to Europe a mad one and advised me to read Gail Tverberg's articles. In her article “The Absurdity of US Natural Gas Exports”, Tverberg gives a comprehensive analysis explaining why America's gas crusade to Europe is ill-intentioned not only against Russia but Europe, as well.

Gail Tverberg writes, “Another issue is that with shale gas, we are the high cost producer. There is a lot of natural gas production around the world, particularly in the Middle East, that is cheaper. If we add our high cost of shale gas to the high cost of shipping LNG long-distance across the Atlantic or Pacific, we will most definitely be the high cost producer. Other producers with lower costs (even local shale gas producers) can undercut our prices. So at best those shipping LNG overseas are likely to make mediocre profits. And there would seem to be great temptation to stir up trouble, to encourage Europe to buy our natural gas exports, rather than Russia’s. Of course, our ability to provide this natural gas is not entirely clear. It makes a good story, with lots of “ifs” involved: “If we can really extract this natural gas. If the price can really go up and stay up. If you can wait long enough.” The story makes the US look more rich and powerful than it really is. We can even pretend to offer help to Ukraine”.

Third sanctions' level: the credibility of the Iranian model

At the beginning of sanctions' hysteria, there was much talk about applicability of Iranian type of sanctions against Russia. The Iranian sanctions regime had three components. First, it included prohibitions on oil, tanker fleets, and the insurance industry, which grounded the Iranian oil trade to a halt and cost the country many billions of dollars in export revenue. Second, banking sanctions cut off Iran from the international banking system, making it virtually impossible for the country to engage in any form of international commerce. And third, Obama invoked the U.S. International Emergency Economic Powers Act (IEEPA), which allowed him to block Iranian assets subject to U.S. jurisdiction (such as those belonging to the Iranian Revolutionary Guard Corps and its various commercial and logistical affiliates) and made it illegal for U.S. citizens to do business with designated persons or companies.

The US hawks were citing US success which forced Iranian President Hassan Rouhani to start talks with the U.S. on the Iranian nuclear problem. The reality was quite different, not Rouhani but Obama himself called him on September 27, 2013, after the 68th UN General Assembly meeting on Syria where he failed to promote military intervention to Syria. In the best traditions of the US propaganda, his call to Rouhani was declared as a big strategic victory of the US sanctions' policy. However, more sober researchers question the efficiency of the Iranian model. Andrew Cockburn said, “The Joint Plan of Action agreed to last fall between Iran and the so-called P5-plus-1 negotiating team — the five permanent members of the U.N. Security Council and Germany — stipulated that Iran would not continue to enrich uranium to levels above 5%, implicitly recognizing that Tehran can enrich uranium. All those years of throttling the Iranian economy, impeding even shipments of food and medicine, for this?”

Lee S. Wolosky in his article “How to Sanction Russia: And Why Obama's Current Strategy Won't Work” reluctantly admits, ”the sanctions against Russia would be missing two components that made the ones on Iran work: energy and banking. Energy accounts for 70 percent of Russia’s annual exports, so energy sanctions could, in principle, be a meaningful tool for rebuking Russia. But much of Russia’s oil and natural gas (unlike Iran’s) goes significantly to Europe, and Europeans have not been willing or eager to change that quickly. And without adequate preparation, such sanctions could cause a shock to world oil markets that could undermine the global economic recovery”. In his interview to Dimitri K. Simes at The National Interest, Sergey Glazyev, an adviser on Ukraine to President Putin estimated the possible consequences of Iranian type sanctions.

“If we assume that they would adopt sanctions against Russia similar to those against Iran, according to our calculations, this would cost the EU 1 trillion euro. The sanctions would disproportionately affect the Baltic republics: for example, the potential losses for Estonia are estimated at the size of Estonia’s annual GDP; Latvia and Lithuania would incur losses the size of half of their annual respective GDPs; Germany would incur a loss of 200 billion euro”.

Among all crazy suggestions which has been overflooding these days the Western mass media, I really liked only one reasonable idea. Juan C. Zarate calls to “a broader effort that marginalizes illicit and suspect financial behavior — not just those activities tied to the invasion of Ukraine. This should be a conduct-based campaign that moves banks and companies to reconsider doing business and investing in Russia... Such a campaign would entail aggressive investigations of illicit financial activity of Russian interests globally — tied to concerns about money laundering, corruption, tax evasion and links to Russian organized crime”. Why do I appreciate this proposition? Mainly, because it coincides with Putin's struggle against offshores and corruption. If the international community would take part in this fight, then illegal businesses would really feel that they won't find refuge in safe havens under US and UK jurisdiction and return in Russia. Such kind of sanctions would turn into a real benefit for Russia.

At the time being, Europe resorts to toothless political bites which are intended to rise its own self-esteem but, instead, exposes it in a rather unflattering light. Recently, the Council of Europe (PACE) passed a resolution that puts all the blame for the Ukrainian crisis on Moscow and also deprived the Russian delegation of voting rights and the right to participate in the governing bodies of the Assembly til the end of the year.

Observers can notice that currently Russia has been restraining from backbites. Meantime, Russia has a broad scope of more efficient means of retaliation...

TheWest and Russia: a tit for tat game. Part1.

(To be continued)

The West and Russia: a tit for tat game

Guest post by Tatiana Yugay

Tatiana 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)