Three years of sanctions against Russia. Now what?

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Three years of sanctions against Russia. Now what?

Written by Borislav Boev; Originally appeared at A-specto; Submited in English to SouthFront via author

It’s been three years since the beginning of the EU sanctions against Russia. There’s been a great controversy whether these sanctions work or not. If we want to understand EU’s sanction policy, first we must deeply analyze its intentions and results.

For the last 20 years the European Union uses its sanction policy as an instrument for international pressure against particular government. Contradictory or not these sanctions almost always have been syndicated with the US sanction policy. The main questions about the sanctions and their effectiveness are

  • Do they achieve their strategic goal?
  • Do they support (any) political opposition in the particular country and if so, why?
  • What would be the long-term consequences for the population of the sanctioned country?

So, have the sanctions against Russia achieved their strategic goal?

The pretext for implementing sanctions was Russia’s behavior in Ukraine and the conclusions made by some Western countries on that basis. From geopolitical standpoint EU was looking on Ukraine as a new marketplace, but Europe failed to realize that at this time Ukrainian economy wasn’t ready for integration with EU at all.

Sanctions targeting Russia undoubtedly had some negative economic effect on the Russian economy, especially in 2014 and 2015. Although it’s still hard to say what’s the exact damage, European leaders believe that sanctions brought down the Russian GDP with 1 percent between 2014 and 2015.

Economic sanctions, no matter what, always have negative effect on both sides. EU sanctions against Russia make no exception. Apart from the negative consequences for the Russian economy, sanctions had hit European economy as well. Pre-sanctions trade between EU and Russia in 2013 was amounted to be 326 billion of euro, but from 2014 there was a steady decline. Bilateral trade dropped to 285 bln. euro in 2014, and 2015 was even worse – not more than 80-100 bln. euro. This decline had considerably worse effect on EU’s economy compared to the outcome of the Iranian sanctions for example.

We can clearly see that the Russian leadership was ready to meet the negative impact and pay the economic price, because there was big bet – Russia had to restore its forgotten international prestige. Sanctions were the only weapon in EU’s economic and political arsenal that could be used against Russia at that time. Since the very beginning was clear that nor NATO or the US would ever use military force against Russia – that would bring catastrophic consequences for the whole region. Some countries from Eastern Europe like Poland, Latvia, Lithuania and Estonia, known for their antirussian rhetoric, had rushed and implemented economic sanctions against Russia, hoping they will isolate and drown the Russian economy in no time. Other countries like Hungary and Italy were skeptical about the sanctions and their implementation, but silently supported them.

We must not forget that the big loser from this geopolitical standoff is Ukraine. In March 2016 Jean Claude Junker said that Ukraine probably wouldn’t join EU in the next 20-25 years.

Ukraine has lost from its own revolution. On one hand Ukrainian establishment achieved success in breaking the economic ties with Russia (which was Ukraine’s main trade partner for decades) and from the other – Ukraine was left alone by its EU partners.

In April 2016 The Netherlands rejected the famous proposal of trade deal with Ukraine and brought Kiev’s ambitions for closer cooperation with EU to an end.

Negative consequences for the Russian economy

Undoubtedly there has been a negative effect on the Russian economy, although these maybe fall to the ‘collateral damage’ category. The EU sanctions were the main reason of Russian financial crisis at the end of 2014. EU always knew that financial liquidity has been always a problem for Russia and the sanctions fired at that direction. The sanctions had hit Russia’s financial system and private sector, and the latter applied pressure to the government by asking for financial help. According to the World Bank, sanctions worsened Russia’s ability to trade and access the international markets and thus the rubble suffered. Problematic ruble lowered the interest from some foreign investors.

These EU sanctions have been helped by the low oil prices in 2014. All these chicken have come to a roost and by the end of 2014 the rubble was collapsing. Russian Central Bank had to intervene to stabilize the course.

The boomerang effect on EU and how the Union suffered from its own sanctions

The sanctions against Russia had a big impact on the European economy. The outcome for Europe was much worse compared to the US, as the latter initiated sanctions as well. In 2013 trade with Germany, which is the most powerful economy in EU, amounts to 77 bln. euros. In 2014, only one year after implementing sanctions against Russia, bilateral trade registered significant drop by 13% or 285 bln. euros (compared to 326 bln. for 2013).

The negative impact arises from the fact that the exports of goods decrease equally with imports, which is very bad for the European economy. Big trade partners like France, Germany, Netherlands and Poland were hit hard by these sanctions – they lost more than 10 billion of euro in 2015.

Contrary to that, direct foreign investments between Germany and Russia are showing some signs of increase. According to the Russian fund for direct investments, Germany is the second largest investor in Russia (The first one is China). Russian ministry of economy says that German firms have invested more than 2 billion of euro in the country as of 2016.

If two main trade partners, which undoubtedly are Russia and the EU, stop or restrict their bilateral trade, it’s 100% sure their economies would be harmed. Europe has suffered huge losses from these sanctions. The question is why EU thought it would bypass these negative effects?

There is some hope for the Russian economy itself. Liquidity assets have increased over the past year and as of March 1, 2017 are amounted to 397 bln. dollars – a positive sign of fiscal stability in the country.

Russia have met 2017 with optimism about its economy. GDP shrank by only 0,2% in 2016, compared to the drastic decline of 2,8% by 2015. That may be regarded as a positive sign. The stabilization of the Russian economy is largely due to the fact that agriculture, industry and mining are on the rise. Industrial production jumped by 3,2% in December 2016 compared to the same period in 2015.

The complete recovery of the Russian economy however passes through increasing the purchasing power of Russian citizens. If there is a crisis in demand, the positive trends in other sectors won’t be felt. If these positive trends however continue throughout the year and the oil prices remained stable, we can surely say that in 2016 Russia might be able to achieve growth in GDP of around 1,7%.

The worst years of sanctions were 2014 and 2015. They brought severe damage for the Russian economy. But Russia handled the sanctions relatively well and managed to recover. Earlier this year the President Putin said that Russians have gone through sanctions. There is a reason behind such optimism – there are positive trends in Russian economy.

On the other hand, The EU turns blind eye to the negative effect of its own sanctions. Many politics still believe in the mantra of solidarity, without considering the latest developments in both EU and Russia. We must understand that the world of 2017 is totally different from the world of 2014.

Despite negative effect on the Russian economy, the EU sanctions didn’t achieve their strategic goal. Crimea remains within the Russian Federation. Russia continues to fight terrorism in Syria.

Inside EU, the disagreement about the sanctions have weakened the political system in Europe. Italy and Hungary still show different view and EU should consider their opinion instead of making decisions of automatic renewal of the sanctions. The most affected European economies cannot continue to ‘wander between the sanctions’, because the negative impact is becoming a real issue.

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