Assessment of Russian Reaction to Unilateral US Sanctions

Introduction

In recent years, the United States has intensified its unilateral policies to pursue its interests and impose its opinions and wishes on other countries. The failure to fulfill its international obligations, withdrawal from international treaties and organizations, neglecting previous commitments to human rights, environment, and trade, are some of these unilateral policies. Intensified unilateral sanctions in recent years is one of the most significant manifestations of unilateral US policies, aiming to exercise economic and social pressure on other countries and force them to abide by White House strategies. As one of America's rival countries with serious conflicts of interest with Washington, Russia has been the subject of unilateral sanctions by the US over the past seven years.

In 2014, the US and EU member countries imposed a wide range of economic sanctions on Russia following its occupation of the Crimean Peninsula. Canada, Norway, and Australia also joined in with the US and EU in implementing them. The first round of sanctions executed against Russia in March 2014 was relatively mild. But tougher sanctions were imposed in July and August 2014, after a Malaysian Airlines plane was shot down by a Russian missile. These included restrictions on financing the debts of several large Russian companies. Russia quickly reacted to the sanctions and stopped the import of certain food items from sanctioning countries.[1]

Overall, these sanctions have greatly impacted various economic sectors in Russia in recent years. This, however, has been less than the impact of fluctuations in the price of oil. The main effect of Western sanctions against Russia has been diminished access by its companies to foreign funding. In addition, some unilateral US sanctions imposed without coordination with the EU have created uncertainty for Russian companies, with negative economic effects.[2]

Russian countersanctions on the West have also had economic consequences for this country. This has led to less variety in foodstuffs and a rise in prices.[3] At the same time, the country has been able to increase some of its own foodstuffs. It has clearly linked its countersanctions to the policy of substituting imports in general in order to reduce its dependence on imported foodstuffs. The EU reviews and extends its sanctions on Russia once every six months. Therefore, even if the EU lifts its sanctions, the ban imposed by the Kremlin on the import of foods from Western countries will remain in place for a long time.[4]

 

The Logic of Russian Economic Sanctions

Once Donald Trump had taken office and started emphasizing the slogan of “America First” by implementing its extremist patriotic policies at home, focusing on isolationism and expansionism abroad without the need to attract and persuade allies at the international level, a new era of unilateralism began in US foreign policy. The Trump administration transformed sanctions into a main element of his unilateral policies to counter competing and hostile states and extended their range to a number of countries.

The economic sanctions imposed on Russia and other countries, such as Syria, Iran, Venezuela, and North Korea, showed interest in using sanctions as a weapon to advance foreign policy goals. In the case of Russia, it does not seem as if the sanctions were used to force this country to change its policy on the Ukraine or evacuate the Crimean Peninsula. The said sanctions have three objectives: 1) stopping the spread of Russian military ambitions, 2) Condemning violations of international law and EU norms by emphasizing that normal relations with Russia will therefore not be possible, and 3) Encouraging Russia to come to political terms with its rivals by increasing the cost of this country’s behavior. The scope of Russian sanctions on the whole remains small as compared to some other countries sanctioned by the US and the EU. Therefore, it can be deduced that their aim was not to destroy its economy or drastically reduce the quality and standards of living of its people, unlike sanctions imposed on Iran and North Korea.[5]

This is the first time sanctions have been used against a country with a large economy integrated into the global economy. Russia’s GDP was 11^th in the world in 2019 prior to the outbreak of the coronavirus pandemic, amounting to over 1.7 trillion dollars.[6] Russia is the largest exporter of natural gas, and the first or second exporter of crude oil, competing with Saudi Arabia. Hence, imposing harsh, comprehensive economic sanctions on this country will have widespread global consequences. On the other hand, Russian banks and companies are widely active in global financial markets.

 

Russian Reaction to Economic Sanctions

The first round of sanctions against Russia were relatively mild, including travel, limited access to assets, banning trade with a number of individuals and companies, such as certain agencies in Crimea, and the port of Sevastopol on the Crimean Peninsula. But following the crash of the Malaysian airliner, a ban was imposed on Russia’s import-export of weapons and the export of dual-use goods which could also be used in the military sector. Exports of some items to Russia related to oil excavation and production were also blocked.[7]

The most important sanction was a ban on funding needed by Russian companies that had no direct involvement in the Russian wars in the Donetsk and Luhansk regions. Investors in the US and EU were also barred from providing long-term funding to key Russian banks.[8] Initially, financial bans only applied to loans with a maturity date of more than ninety days. But this was reduced to 30 days at a later date. The said bans were applied to Russian oil companies, such as Rosneft, Transneft, Gazprom, and some military companies. Russia reacted in July 2014 by imposing a ban on the import of some foodstuffs from the US and EU, such as fish, fresh milk, dairies, fruit, and vegetables, in line with Russia’s new strategy of replacing these with domestic production.[9]

 

The Impact of Economic Sanctions on Russia and Sanctioning Countries

Russia’s economic growth has not been significant over the past decade. The country’s growth rate slowed even when the price of a barrel of oil went over USD100 in 2012-2013. In 2014, its GDP grew by only 0.7%, dropping 2.3% in 2015. Over the past five years, in pre-pandemic times, GDP growth in Russia was less that the global GDP, leading to its reduced share in the world economy. But to what extent can this be contributed to Western sanctions? To answer this question, Russia’s poor economic performance before the sanctions and impact of oil price fluctuations must be pointed out. The price of Urals crude oil fell by about 50% from June 2014 to early 2015. Given that carbohydrates form two-thirds of Russian exports, together with half of its tax revenues, the drop in oil prices was a huge shock to its economy. Continued drops in oil prices in the coming months and years exacerbated the issue.[10]

A 2019 research by the IMF shows that sanctions have reduced Russia’s annual economic growth by 0.2% from 2014 to 2018. But reduced oil prices have been even more significant at 0.7% annually.[11] Examining Russian sources also suggests that lower oil prices have played a greater role in slowing Russia's economic growth than sanctions, showing that sanctions in 2014 and 2015 led to a 1.2% drop in is domestic GDP. Much of this impact has been due to the declining investment potential of Russian banks.[12] This drop has been estimated at 1.5% from 2014 to 2017 in another study.[13]

Other studies also show that the negative impact of Western sanctions on Russia’s GDP were limited to mid-2014 to early-2016, while the drop in oil prices continued to have a greater impact.[14]

Anti-Russian sanctions have been more challenging for the country's foreign trade and financial sector. They have also impacted trade for sanctioning countries. Financial losses in Russia’s foreign trade from the start of sanctions in 2014 until their end in 2015 were estimated at 54 billion dollars. In return, Western countries also suffered losses of 42 billion dollars for sanctioning Russia, 90% of which was for EU countries. The interesting point is that the loss for the most part pertained to commodities in the commercial sector, which were not banned by either side. This was due to diminished access to financial resources and concerns over violating sanctions.[15]

Exports by sanctioning countries to Russia from mid-2014 to the end of 2016 were about 10.5 billion dollars less than a similar period before the start of sanctions. The bulk of the drop was due to countersanctions by Russia.[16] Another study found that half of the plunge in EU exports to Russia was due to reciprocal Russian sanctions rather than EU sanctions on Russia. On the other hand, a weaker ruble and reduction in Russia's purchasing power due to Western sanctions and falling oil prices also played an important part.[17] From mid-2014 to the end of 2016, EU exports to Russia were also 11% (around 35 billion dollars) lower than they would have been if sanctions had not been imposed. The bulk of the drop in exports was in agricultural products, which were banned from being imported into Russia due to the country’s countersanctions. At the same time, reduced oil prices and purchasing power by Moscow, alongside banking restrictions, also contributed to the situation.[18]

Those Russian companies which were sanctioned performed poorly as compared to those which were not. Their annual income was reduced by one-fourth on average and their assets were halved. They had to reduce their workforce and most of them lost much of their competitiveness in the market compared to their Russian peers.[19]

The most important challenge of sanctions for Russia, however, was constrained financial procedures both for its macroeconomics and its businesses. The sanctions reduced investment in the country and its access to foreign financial resources. An immediate outcome of this was the increase in Russia’s foreign debt. In March 2014, the foreign debt of Russian banks reached an unprecedented 214 billion dollars. Russia was able to reduce this figure by 65% in September 2019, to 74 billion dollars. The bulk of the debt was due to sanctions imposed on two large Russian banks, VTB Band and Sberbank. Russia was unable to find adequate foreign investment, in particular in the first two years of sanctions. But in recent years, investments by China and India in its energy sector have resolved the issue to a certain extent. Nevertheless, Russia’s banking industry has not returned to its pre-sanctions situation yet. Large international banks also shun the risk of working with Russian banks for fear of being placed on the US Treasury black list.[20] The decline in capital flow to Russian banks since the start of Western sanctions is estimated at an average 700 million dollars every three months.[21]

 

Creative Russian Reactions to Sanctions and Expansion of Ties with Iran

Apart from its countersanctions on the West, Russia also took some other creative measures. Following the initial sanctions in 2014, it increased the price of natural gas exports to Ukraine. As a result, Ukraine had to reduce its imports of gas from Russia, leading to a reduction of Russian gas transfer to countries such as Poland, Slovenia, and Romania.[22] On 6 August 2014, the country also implemented a directive by the president according to which – as mentioned previously – imports of foodstuffs and agricultural produce from the EU were banned. Other plans also forecast in the directive, however, were never widely implemented. These included total or partial suspension of economic, technical, and military cooperation with sanctioning countries, ban or restriction of financial transfers, ban or restriction of international economic transactions, cancellation or suspension of international trade agreements to which Russia is a party, change in export-import tariffs, ban or restriction of access to Russian ports and airspace by sanctioning countries, restricting their tourism activities, and suspension of Russia's participation in international scientific and technological programs with these sanctioning countries.[23]

The Russian government also envisaged other reciprocal restrictions for the Western countries sanctioning it, including a ban on importing mineral raw materials, freezing foreign assets in Russia, enforcing advance payments for gas imports from Russia, banning the import of Western fabrics and cars, banning or restricting flights by sanctioning countries over Russian territory, and preventing the return of some Western equipment to their countries of origin. It must be noted, however, that most bans and restrictions bore a financial weight for Russia and were not applied. For instance, Russia only announced a strict ban on flights by Ukraine International Airlines over its territory.[24]

Another measure was to expand ties with China. In May 2014, the two sides agreed to build a new gas pipeline dubbed the Power of Siberia, transferring Russian gas from eastern Siberia to China over a 3000-kilometer pipeline, starting in 2019. In 2020, Russia exported 1.4 billion cubic meters of gas to China. This figure is forecast to reach six billion cubic meters in 2021.[25]

On a trip to Turkey in December 2014, Russian President Vladimir Putin also announced the end of construction for the South Stream gas pipeline to transfer gas to Europe through the Black Sea and the start of cooperation with Turkey to invest in another pipeline for the transfer of gas to southern Europe through this country. The aim was to emphasize Russia's seriousness in increasing the diversity of its gas customers and finding new ways to mitigate EU sanctions.[26]

In 2015, Russia banned entry by a range of EU officials to its territory. In May of the same year, a list of 89 EU political figures was published who were banned from entering Russia. But officially, Russia never accepted this to be a reaction to the imposed sanctions.[27]

Unilateral US sanctions on Russia expanded cooperation between the latter with Iran on the international stage. Authorities from both countries repeatedly stressed on strengthening cooperation to counter unfair, illegal US sanctions against other countries, Iran and Russia in particular, and intensified their consultations and coordination on Syria and Yemen, security in the Persian Gulf, and human rights, as well as in international organizations such as the UN and IAEA.[28]

 

Conclusion

Overall, US and EU sanctions on Russia have not had a great negative impact on this country, because:

 

1. The extent of the sanctions is not comparable to those imposed on Iran and North Korea. Russia has suffered more from a drop in oil prices than Western sanctions since 2014 to date.
2. After taking office, Putin accelerated the speed of reducing dependence on the West and expanding ties with countries like China and Turkey from the middle of the last decade.
3. In contrast to the US, the EU is not interested in maintaining or increasing tensions with this country due to economic and geopolitical links with its Russian neighbor and the need to import its gas.

4. Contrary to the sanctions imposed on Iran, Russian sanctions lack the same inclusiveness and complexity, never covering an entire economic section or trade. For instance, sanctions on the sale of rocket fuel to Russia have never included certain vital chemicals to produce the fuel and, therefore, never created serious problems for this country. Also, sanctions have not been updated over the past six years since the industrial sector and businesses in the 28 EU member countries lack interest in doing so; thus, they pressurize their governments not to pursue the policy, making it difficult to even keep the existing level of sanctions. As a result, Russia’s domestic GDP has grown adequately since 2018 after the initial shock of sanctions in the first three years, increasing from 0.3% in 2016 to 2.3% in 2018.[29]

Given the above, policymakers in the IR of Iran can increase economic and security ties with powerful, allied countries, in particular Russia, China, India, and Indonesia, to reduce the impact of unilateral US sanctions and take a leaf out of the Russian initiative to put pressure on the Western side by sanctioning their exports, relying less on the dollar and euro in foreign trade by concluding bilateral monetary agreements, diminishing dependence on the international banking infrastructure, forming coalitions, making new allies, and resorting to force and threats if necessary.

As Russia considers Iran to be a country with unique potentials to deal with unilateral US sanctions and counts on its capabilities as a strategic partner against the United States, it seems interested in exchanging experiences with Tehran to help reduce the pressure of sanctions in certain economic areas at least. Collaborations of this kind reduce the chances of success and impact of unilateral sanctions in particular, and the unilateral US policy in general, forcing the White House to review this. The new US president, Joe Biden, seems to have reduced unilateralism by understanding this and turned to forming coalitions and attracting allies to advance US foreign policy, more so than his predecessor.