Why Sanctions against Russia Can Still Make a Difference

Longer term, sanctions will limit Russia’s ability to invest properly in its oil and gas infrastructure, reducing its growth potential.

Despite the role they played in achieving a nuclear deal with Iran, sanctions continue to face a steep challenge in arresting Russian adventurism in Ukraine. A year after their adoption in July 2014, it remains an open question whether the sanctions adopted by the European Union and United States will be effective. While sanctions against Moscow will never be as ambitious as they were against Iran, we believe they can still make a difference toward creating a more stable situation and giving Ukraine time to become a more successful, politically independent country. But to do that, sanctions require more realistic targeted objectives and time.

Sanctions imposed against Russia have already proven their efficiency on the economic front by capitalizing on existing Russian weaknesses. Even before the Ukraine crisis, loss of confidence in Russia had already started a significant amount of capital flight and brain drain.  The collapse of oil prices starting in the middle of 2014 further depleted the resources of the oil-export reliant country. International sanctions targeting two strategic Russian economic sectors – finance and energy – aggravated the situation by making capital more difficult to access and future investment in Russia’s oil and gas sector largely sanctionable. As a result, Russian GDP is expected to decline by 2.7 percent in 2015, according to the World Bank’s latest statistics.  The specific contribution of sanctions to that recession could be significant, as the European Commission estimated in October 2014 that sanctions would have a negative impact of 1.1 percent on the 2015 Russian GDP.

Longer term, sanctions will limit Russia’s ability to invest properly in its oil and gas infrastructure, reducing its growth potential. This will be a big deal for a country where demographic prospects already threaten low economic growth over the next decade. Russians continue to trust President Putin to lead their country and, in fact, he has grown more popular since the crisis erupted in December 2013. But even if President Putin’s grip over the politics of Russia is not weakened, he will preside over a country whose power will diminish if its economic situation does not improve.  It is reasonable to argue that the latest Russian adventure in Syria is, in part, an attempt to continue distracting the Russian population from its domestic economic troubles and to demonstrate an exaggerated sense of power to the outside world.

It seems unlikely that the present ceasefire agreed in Minsk by Moscow and Kyiv will result in a political solution that permits the sanctions to be lifted. While violence in eastern Ukraine has declined significantly since the ceasefire brokered by France and Germany was signed in February, violations are a daily occurrence and the possibility of another wave of violence through the launch of renewed offensives by Moscow-backed separatists cannot be dismissed. A renewed commitment to the ceasefire around the start of the school year in Ukraine has enabled the situation to be quieter lately, but the situation remains very volatile and violations take place on a daily basis.

As a consequence of these violations, the target for implementation of the political part of the Minsk ceasefire agreement – which would give greater autonomy to eastern Ukraine in exchange for Kyiv controlling the border again – at the end of 2015 appears unrealistic.  The EU’s decision three weeks ago to extend some of its individual sanctions until March 2016 was both expected and can be changed if the terms of the ceasefire are fully implemented by the end of the year, but seem symbolic of the likelihood that this deadline will pass unfulfilled. But the situation now appears to be slowly drifting toward a frozen conflict. While this may be better than a warm one consuming Ukraine’s resources, it still remains a bad scenario for Ukraine’s President Poroshenko, who is engaged in a herculean effort to keep his country together while reforming and modernizing it.

The question for Europe and the United States then becomes whether and how to turn up the pressure on Moscow to create the conditions for a long-term, amicable resolution to the crisis. Some of this pressure will need to be political in nature, and some of it will need to come from expanded sanctions, particularly since the World Bank also forecasts a slight Russian growth rebound of 0.7 percent in 2016.

We believe that it is unlikely that sanctions alone will force Moscow to stop sponsoring rebel and separatist groups in eastern Ukraine or renounce a direct hand in influencing Ukraine’s future. Sanctions are even less likely to lead to a restoration of Ukraine’s sovereignty over Crimea. Moscow has deemed these issues to be in Russia’s strategic interests, which it will defend through force if need be (and which it has shown every indication of being prepared to do).