Following the annexation of Crimea earlier this year, the EU has implemented escalating sanctions against Russia. Borja Guijarro-Usobiaga writes on the impact the sanctions are having on both Russia and Europe. He argues that with neither Russia nor the West willing to make unilateral concessions to solve the crisis, the most likely result is a lasting political deadlock until the costs experienced by both sides provide incentives to normalise relations

Guijarro-Usobiaga, Borja

LSE Research Online

Vladimir Putin meeting Italian Prime Minister Matteo Renzi in October, Credit:Palazzo Chigi  (CC-BY-SA-ND-NC-3.0)11/11/2014Russia and the West are now firmly locked in a war ofeconomic attritionblogs.lse.ac.uk /europpblog/2014/11/11/russia-and-the-west-are-now-firmly-locked-in-a-war-of-economic-attrition/Following the annexation of Crimea earlier this year, the EU has implemented escalating sanctions againstRussia. Borja Guijarro-Usobiaga writes on the impact the sanctions are having on both Russiaand Europe. He argues that with neither Russia nor the West willing to make unilateral concessionsto solve the crisis, the most likely result is a lasting political deadlock until the costs experienced byboth sides provide incentives to normalise relations.On 29 July the European Union (EU) imposed so-called tier three sanctions against Russia. Thereal effect of these measures is only starting to be felt now, yet the implications are far deeper thanmany had imagined. At stake is not only Europe’s geopolitical and regional stability; businesses andindividuals on both sides of the table are starting to feel the impact of sanctions as well.The new round of sanctions imposed on Russia is in many respects unprecedented. The EU has restricted Russianbanks’ access to long-term loans, it has imposed an embargo on the export of dual-use equipment for military use,and it has banned the export of a wide range of items and technology related to the oil industry. The gas sector,however, has been left untouched so far. These measures go far beyond the visa-bans and asset freezes that werealready in place against certain individuals involved in the destabilisation of Ukraine.But sanctions are also unprecedented for another reason: the EU had never before imposed economic sanctionsagainst a country with which it shares so many commercial, energetic, and security ties. While the EU has had someexperience – and some would even argue success – in the use of economic sanctions against Iran, this time it hasentered into uncharted waters. And few seem to have thoroughly thought through the consequences of thesemeasures.Far from forcing Putin to back down and put a brake onhis ambitions in Eastern Ukraine, sanctions havecontributed to a hardening of his position. Moreover, andeven though unintended, they have sparked nationalisticsentiments in Russia, with polls registering a spike inPutin’s popularity. Yet while Putin rallies support athome, the EU and the US are unwilling to go back tobusiness as usual with him after the traumatic redrawingof Europe’s borders by an ever assertive Russia.Escalation has thus led to a political deadlock whereneither Putin nor the West are willing to make unilateralconcessions to solve the crisis. And given the unlikelyprospect of a direct military confrontation between thetwo parties, a war of economic attrition seems the onlyscenario left. With a solution to the regional crisisslipping away, the coercive effect of sanctions is startingto be felt on bothsides.The economic costs of sanctionsAlthough no one knows for sure what the real cost of sanctions is, one thing is certain: they are imposing a huge1/4economic burden on Russia. The flow of international investment into Russia has stalled, and the European Bank forReconstruction and Development has frozen all new projects in the country. Moreover, Russian banks have seentheir access to Western capital cut. This has increased the refinancing costs of banks, making it increasingly difficultfor Russia to pay its debt and limiting the Kremlin’s capacity to invest and modernise infrastructure, especially in theextraction sector.Furthermore, the rouble has continued to fall against the dollar, increasing the cost of imports. These difficulties addto the shortages of products in supermarkets caused by Putin’s ban on imports of food and agricultural productsfrom the EU, which has backfired forcing businesses to struggle for substitutes in an underdeveloped domesticmarket. To make things worse, inflation is expected to soar in the coming year.Yet the most daunting task Putin has still to face is an uncertain future with increasingly low oil prices. With morethan half of Russia’s revenues originating in the export of oil and gas, financing the budget deficit is likely to becomechallenging. Also, if prices remain low in the longer run, Russia is likely to have a bigger problem as its economy isstagnating and its budgetary estimations are based on high oil and gas prices.However, sanctions are taking their toll in Europe as well. Most importantly, sanctions have generated an immenseuncertainty among business circles. European firms are trying to make sense of the limitations and scope thatsanctions impose on their commercial activities, including trade, investment and insurance operations with thirdparties operating in Ukraine and Russia. Due to the legal consequences that businesses could face if they violatesanctions, concerns have arisen regarding the extent to which it is possible to carry on with their regular activities.Unfortunately, complying with sanctions is not a straightforward task. Besides the difficulties in understanding what isallowed and what is not due to a lack of clear regulatory provisions and national or European guidelines, other issuessuch as linguistic differences between EU and US provisions (e.g. concepts like “derivatives” mean different thingsin the US and the EU) pose further challenges for private companies. As a consequence, businesses are devotingincreasing economic and human resources to make sure they comply with current EU and US legislation.However, the biggest concern for EU policy-makers is the fear of Russian retaliation. Putin’s ban on food andagricultural imports from the EU has already had a very negative impact on Southern European farmers. And whilethe European Commission has reacted swiftly by setting up a compensation fund to pay for export losses, newretaliatory sanctions are looming on the horizon that might generate bigger disruptions for European economies.The most obvious concern for some EU member states relates to a potential cut of Russian gas supplies duringwinter. Putin has warned EU countries and Ukraine that they could see the flow of gas stopped if the latter does notmanage to pay its debts. Since the most important pipelines connecting Russia with EU countries cross Ukrainianterritory, anxiety among member states that are heavily dependent on EU gas have grown.But the Kremlin has also threatened to impose other countermeasures. First, it has insinuated that it could close itsairspace to EU commercial flights. This would substantially increase the cost and duration of European flights toAsia, as airlines would have to divert to longer routes, consequently requiring larger amounts of fuel. And second,Putin has remained passive to legislative action in the Russian Duma that would allow for the nationalisation offoreign assets to pay for the losses of Russian companies.The geopolitical implications of sanctionsWhile the current deadlock between the West and Russia over Ukraine remains, other actors have taken advantageof the situation. Latin American countries have been keen to replace the EU’s exports of food and agriculturalproduce following Putin’s ban on EU imports and have ignored EU pledges not to do so. Most strikingly, and eventhough the EU has managed to convince most of the countries on the path to EU membership to align themselveswith its sanctions regime, Serbia has refused to do so, rolling out the red carpet for Putin’s visit to Belgrade inOctober instead.2/4The EU’s incapacity to convince its allies to support its sanctions regime has also been evident in Asia, where Japanhas only imposed mild sanctions on Russia and where South Korea has refrained from imposing any measurewhatsoever. Yet the indisputable beneficiary of Western sanctions has been China. Since the beginning of the crisis,China has played an ever more important role, with Russia moving closer to its eastern neighbour. The relationsbetween both countries have improved substantially in the last months, leading to a historic agreement on theconstruction of gas pipelines from Russia to China.Regional tensions are also mounting in other parts of Europe, as the Swedish government has been involved in thechase of an (allegedly) Russian submarine in its territorial waters and as Russian spy planes have repeatedlyviolated Estonia’s and Sweden’s airspace.A way out?The mutual trust that has been built between the West and Russia since the end of the Cold War has vanished.Undoubtedly, sanctions stand in the way of improving the relationship with the Kremlin, yet the EU is not willing to liftthem without changes in Russia’s behaviour. Sanctions are thus likely to remain in place for the foreseeable future,with all the uncertainty that this implies.However, the political deadlock should not be read as a new version of the Cold War. Russia is now much moreintegrated into the world economy, it has become a member of the World Trade Organization and it largely dependson its exports of oil and gas to keep its economy afloat. Moreover, it is questionable whether Russia’s new economicand political opening to Asia, and especially to China, constitutes a feasible long term alternative, as it will lead to anuncomfortable asymmetric relationship for the Kremlin. Whether this shift actually takes place remains to be seen,but it is more likely that Russia veers again toward Europe in the next few years.The current uncertainty makes it hard to predict what will happen next or how long the conflict is likely to persist. Theonly thing that seems clear is that Crimea’s annexation by Russia is now an irreversible process. Russia will struggleto find international recognition for its action, and the West is likely to keep sanctions against the peninsula in placeuntil a solution is eventually found in the future. But for the time being, this is likely to become yet another frozenconflict in the heart of Europe.While many questions remain unanswered, western analysts are starting to accept that the standoff is going to lastlonger than initially expected. A solution to the crisis is however not impossible, but it will require huge doses ofimagination, patience and, above all, time. As time passes and sanctions impose higher costs on both sides,incentives should emerge to normalise relations. The signing of a gas deal between Russia, Ukraine and the EU is astep in the right direction, yet it needs to be backed by a strong legal and political commitment by all parts. Thiscould then lead to more compromises regarding the situation in Eastern Ukraine.Please read our comments policy before commenting .Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, norof the London School of Economics.Shortened URL for this post: http://bit.ly/1xumwCh _________________________________About the author3/4Borja Guijarro-Usobiaga – LSEBorja Guijarro-Usobiaga is a PhD candidate at the London School of Economics. His researchfocuses on EU sanctions and their effect on autocratic regimes.4/4

Russia and the West are now firmly locked in a war of economic attrition

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