New Russia Sanctions Are Hollow as the Old
Though they sound more serious, the latest Western sanctions against Russia for failing to stop the war in eastern Ukraine are, again, mostly bark and very little bite. The growing disparity between the sanctions imposed by the U.S. and the European Union also raises the question of whether the two are allies in any real sense of the word.
Russia's participation in the events in Eastern Ukraine is progressively less deniable. Videos of Grad unguided missiles fired at Ukrainian territory have been traced -- as conclusively as possible under the circumstances -- to a Russian border town. It is increasingly clear that as Ukraine's military attempts to crush the rebels, Russian President Vladimir Putin cannot afford let it happen: That would damage his popularity at home.
Putin's Ukrainian counterpart Petro Poroshenko faces even more powerful pressure to keep hitting the insurgents with all he's got. The momentum is pro-war, and there are only two ways left in which the West could productively intervene: Provide military assistance to Ukraine or pressure it to make a compromise with Russia, accepting some of its terms. Since both these paths are unpalatable for obvious reasons, and Western politicians must be seen as doing something, there are the sanctions -- but God forbid they should cause trouble for U.S. or European companies. That reticence will make the measures ineffective against Russian ones, too.
The U.S. Treasury Department's new sanctions announcement is a masterpiece of ingenuity. It names large companies such as the state-controlled oil major Rosneft, second-biggest natural gas producer Novatek, third biggest bank, Gazprombank, and government-owned development bank, VEB, which makes for impressive headlines. But the sanctions against them are narrow.
The banks are not banned from dollar clearing, and Gazprombank-issued Mastercard and Visa cards will still work, unlike for a few previously sanctioned small Russian banks.
The energy companies can still trade with U.S. entities. Igor Sechin, Rosneft CEO and Putin's close friend, says he is confident his company's several big projects with ExxonMobil are going ahead, and nobody in the U.S. has contradicted him.
The only thing denied to the big Russian companies will be new financing with a maturity of more than 90 days from U.S. entities and individuals. The markets have already taken care of that: In recent months, it has become hard for Russian public and semi-public companies to line up foreign credit. They have been preparing for this moment since March, and Rosneft, for one, accumulated $21 billion in cash and other short-term financial assets at the end of the first quarter as a cushion in case external financing dried up. A back-of the-envelope analysis of Gazprombank's balance sheet shows that last month, less than 12 percent of its foreign-currency liabilities were owed to foreign entities, including U.S. ones, and that share has been shrinking.
Europe has not even gone that far.
The leaders of the 28 EU nations agreed to stop the European Investment Bank from funding further Russian projects. It has disbursed a total of 1.6 billion euros ($2.17 billion) in Russia, none of it this year and a little over 1 billion last year. The EU also decided to use its influence at the European Bank for Reconstruction and Development to stop further funding in Russia (the influence is decisive, though Russia is a big shareholder in the development bank, too). The EBRD's total investment in Russia to date stands at 24 billion euros ($32.5 billion), but in recent years its Russian activity has been shrinking (to less than 2 billion euros last year). In any case, 84 percent of it went to private sector companies, which Putin doesn't worry about too much.
In addition, EU leaders agreed to "consider the possibility of targeting individuals or entities who actively provide material or financial support to the Russian decision-makers responsible for the annexation of Crimea or the destabilization of eastern Ukraine" -- a vague hint that may or may not turn into a list of sanctioned companies by the end of this month. The list, if it does emerge, will probably be less impressive than the U.S. one, given Rosneft's recent activity in the EU.
The disconnect between U.S. eagerness to punish Putin and EU's unwillingness to punish itself is growing steadily. The new U.S. sanctions, meanwhile, cannot be effective without symmetrical European ones. Dollar financing is not the only kind available; Europe may even be a better place to seek resources, now that the European Central Bank is dovish on monetary policy and the U.S. Federal Reserve is tightening it. The wariness about lending to Russian public entities is, of course, present in Europe, too, but that's not the same as actual sanctions.
The Russian stock market tumbled after the sanctions announcement:
It will, however, bounce back, as it has already done this year, as soon as the first speculative rush is over and investors realize the sanctions are, again, more thunder than hail:
The West is still not doing anything that will stop Putin from playing his game of brinkmanship. The conflict in eastern Ukraine will continue and more people will die simply because a true compromise is not acceptable to any of the sides.
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