The fallout and fallacy of Russia sanctions
June 10, 2014, 4:49 am

When the Russian government annexed Crimea, it wasn’t hard to predict that the West was going to have a collective freak-out. The question of whether or not Western policy in Ukraine was correct is a perfectly fair one, but it was obvious that, having already invested a great deal of time, money, and political capital in trying to convince Kiev to take a more EU-friendly approach, the West wasn’t going to allow Ukraine to be divided up or to be pulled kicking and screaming into the Eurasian Union. The minute that the “little green men” started moving, economic sanctions of one sort or another were inevitable.

I know many Western expats who live and work in Moscow, and I feel perfectly comfortable in summarizing their state of mind when the sanctions were first unveiled: blind panic. The US State Department was deliberately unclear about whom it would sanction and when, reserving itself the right to put additional individuals or institutions on the list with little or no advance warning. In the absence of detailed information, peoples’ imaginations ran wild. Many ordinary people, Westerners and Russians alike, engaged in panic-selling of rubles and panic-buying of dollars, sometimes going through the process of exchanging one for the other (and thereby losing massively on commission fees) several times over as the news swayed one way or the other.

German Chancellor Angela Merkel, center, was successful in bringing Putin, left, and Poroshenko, right, together for brief talks [AP]

A multilateral system of sectoral sanctions, were it ever to be introduced, would have had a catastrophic effect on the Russian financial system and would have had an immediate and devastating impact on the economy: companies would be shut out of the debt markets, the ruble would plunge in value, and inflation would spike. Without getting too fancy, every single thing in the Russian economy that could go wrong would go wrong in a heartbeat. It would be a disaster.

But in order to be effective, sanctions have to be multilateral: in today’s globalized world, non-multilateral sanctions are basically a contradiction in terms, so easily can markets navigate around them. But while the Obama White House was in a surprisingly belligerent mood, America’s European allies were clearly not ready to move towards a sanctions regime that would force the Russian economy to grind to a halt. The reason for this is exceedingly simple: the Europeans, who are themselves enduring a years-long economic slump, do far too much profitable business with the Russians to want to crash their economy. Unless Russian troops move directly into Eastern Ukraine, it’s hard to see how the Europeans will get on board a regime that would cause them significant pain.

The threat of sanctions, however, still looms like an axe above the Moscow exchanges and the nervously-traded stock of traditional giants like Sberbank and Gazprom. While the direct impact of the, hitherto limited, sanctions has been minor, the uncertainty they have spawned has not been. The sanctions were a harsh and very unwelcome reminder that, as big as Russia might seem, its economy is still extremely vulnerable to sustained pressure from the United States. This is a lesson that no one should forget anytime soon.

So what would Moscow do in the face of a third round of sanctions? Well so far the Russian authorities have been rather mum: strategies aren’t very effective when your opponent already knows them, and the Russians would have to be quite foolish to let Washington know precisely how they would act.

Russian natural gas exporter Gazprom has warned further Western sanctions over Ukraine could disrupt gas exports [Getty Images]

Would Russia’s counter-moves work? In a limited extent, yes. Russia is, quite simply, a much bigger, wealthier, and more integrated country than Iran: and it’s simply not possible to excise it from the world economy the way one would excise a cancerous legion from the skin. But while Russia wouldn’t be totally removed from the world economy, it would nonetheless suffer quite a lot of damage, damage that would have some significant and unpredictable consequences. Let’s all hope that cooler heads prevail!