Under Pressure: Sanctions on Russia are Producing Results

September 19, 2014

Sally Painter is a member of the Truman National Security Project’s Board of Directors and COO of Blue Star Strategies. Views expressed are her own.

On Thursday, September 18th, Ukrainian President Petro Poroshenko stood before the U.S. Congress and spoke eloquently about the threat facing his country from Russia’s campaign to foment separatism in the east.

But most importantly for a Washington audience preoccupied with other crises from ISIS to Ebola, President Poroshenko also delivered a wakeup call: that the tragedy befalling Ukraine isn’t just an isolated conflict in a far flung country. It is, instead, a challenge to Europe itself and a system of peaceful coexistence that has been carefully constructed over decades.

“With just one move, the world has been thrown back in time,” Poroshenko said, referring to the illegal annexation of Crimea. “The postwar system of checks and balances was effectively ruined.”

In the midst of Putin’s brazen interference in Ukraine, a heated debate has arisen within the European community, NATO, and the United States. While the Obama administration has pushed for a tough sanctions regime, many in Europe have resisted, arguing that the effect of such sanctions would be limited – and that Russia could retaliate by damaging Western economic interests.

This schism has impacted the very foundations of Europe’s common governance, as divisions over Russia complicated the selection of the European Union’s leadership. The first summit held early in the summer to select the EU’s next foreign policy chief and president foundered after concerns that Italy’s Federica Mogherini enjoyed too close of relations with Russia to serve as the next High Representative for Foreign Affairs.

Yet far from being impervious to sanctions, it is becoming clear that Russia—and President Putin—is reeling from the economic pressure. And with the recent adoption of a new round of restrictions on Putin’s inner circle as well as major sectors like energy and finance, now is not the time to let the foot off the gas.

Indeed, a number of indicators are demonstrating that, contrary to fears, Russia is feeling the brunt of worsened relations much more than Western Europe.

Most noticeably, the Russian economy has deteriorated rapidly in the months since the Crimea referendum in March. Growth, which was already low at 1.3 percent in 2013, has stagnated, coming to a complete halt between April and June of 2014. Beyond the likelihood of full blown recession, there is the issue of rapid capital flight from a market newly seen as unstable; $75 billion in investment capital has already fled Russia, topping the outward flow in 2013 by far.

The currency, too, is a bellwether for deeper economic problems. The Russian ruble has fallen nearly 25 percent in the past 18 months, hitting an all time low of 38.71 against the dollar. Analysts have pointed out that the Russian bond market is totally closed down, making it impossible for Russian firms to finance debt in capital markets. This has already led state oil firm Rosneft to request a $42 billion line of credit from the government, but keeping such firms afloat will be increasingly difficult as foreign reserves continue to deplete.

Topping it all off, falling oil prices—which have reached their lowest level in two years—mean that Russia will be facing increasing budget woes. The oil industry accounts for nearly half of all Russian exports.

The message from the government? “Don’t panic,” said Deputy Finance Minister Alexei Moiseyev in mid-September. Nonetheless, he also tellingly admitted that “The sanctions…are going to have an effect for the next one to two years.”

All of this helps explain Putin’s recent willingness to discuss a resolution. A preliminary peace plan hammered out between representatives of Ukraine, Russia, and the Organization for Security and Cooperation in Europe (OSCE) on September 1st has led to a tenuous ceasefire and opened further discussions on the fate of Donetsk and Luhansk.

Any move towards dialogue is a welcome development. But it is more important now than ever to hold Putin’s feet to the fire, in order to deter him from using these talks as mere cover for an even greater escalation in Ukraine. Putin and Russia should only get relief when they come to the table and start making serious changes to their behavior.

A new round of sanctions announced on September 12th are a step in the right direction. The U.S. Department of the Treasury’s Office of Foreign Assets Control tightened restrictions on financing for major Russian interests such as the defense firm Rostec, the largest Russian bank Sberbank, and state energy firm Gazprom. The U.S. Department of Commerce similarly increased the number of Russian firms in the energy, financial, and defense sectors subject to stringent import and export restrictions.

The U.S. and EU should realize that such pressure is having an impact on Russia that goes far beyond any minor shocks to European economies. The sanctions regime is calling Putin’s bluff faster than many of us hoped, and now is the time to intensify these efforts even further.