Why Sanctions Failed to Roll Back Putin: Incongruity among Sanctioning Parties

Journal of Political Risk, Vol. 3, No. 8, August 2015.

By Olena Lennon and Alexander V. Laskin

A woman walks past a shop window with a T-shirt on display reading, 'I Believe in the Ruble', in downtown Moscow, Russia, on Monday, Dec. 22, 2014. The ruble has been the worst performing currency this year along with the Ukrainian hryvnia, having lost half of its value. Its collapse in the past weeks sparked a consumer boom as worried Russians flocked to the shops to buy cars and durable goods before prices rose further. (AP Photo/Pavel Golovkin)

A woman walks past a shop window with a T-shirt on display reading, ‘I Believe in the Ruble’, in downtown Moscow, Russia, on Monday, Dec. 22, 2014. The ruble has been the worst performing currency this year along with the Ukrainian hryvnia, having lost half of its value. Its collapse in the past weeks sparked a consumer boom as worried Russians flocked to the shops to buy cars and durable goods before prices rose further. (AP Photo/Pavel Golovkin)

Recent sanctions against Russia following its military incursion in Ukraine have not been effective in their short-term goal (Russia’s withdrawal from Ukraine) and long-term goal (change of Russia’s regime). By applying Lektzian and Patterson’s theory of winners and losers of sanctions to the Russian case, we argue that the sanctions have not been effective for three reasons: the cost of sanctions is lower than the cost of conceding, the economic costs associated with sanctions are felt disproportionately across groups, and increased restrictions to international commerce have fueled nationalism and empowered Russia’s authoritarian regime. Our analysis of anti-Russian sanctions also points to a gap in Lektzian and Patterson’s theory, which differentiates between the varying types of countries subjected to sanctions, but overlooks the multiplicity of political agendas among sanctioning parties. The case of sanctions against Russia demonstrates a lack of unity and prevalence of conflicting agendas among the sanctioning parties, such as the E.U. countries, the United States, and Canada. Therefore, to better understand the mechanism of sanctions and predict their success or failure, we recommend further categorizing sanctioning countries based on their involvement with the target country in terms of trade, joint research projects, and political alliances. This differentiation will allow us to examine the interaction between the varying types of sanctioning countries and target countries to determine which combinations are likely to bring the desired outcome.

Since Russia’s annexation of Crimea in March 2014 and a subsequent political and military support of separatists in eastern Ukraine, Russia has been experiencing unprecedented isolation from the international community. The Russian military intervention in Ukraine prompted a number of governments to impose sanctions against some individuals, businesses, and officials from Russia and Ukraine. The United States and European Union have expanded sanctions several times, further tightening the rope around Russia’s economy.

On June 22, 2015, the European Union’s foreign ministers voted to extend economic sanctions on Russia until January 2016. The sanctions were first imposed on September 12, 2014 and primarily targeted Russia’s state finances, energy, and arms sectors, allegedly managed by the powerful elite around President Vladimir Putin. While the sanctions were originally placed by the United States, the European Union, and Canada to punish Russia for the invasion and annexation of Crimea, more recently these sanctions have been discussed mainly as a tool to stop Russia’s intervention in eastern Ukraine, where Russia has nurtured local rebels.

These sanctions prevent Russian government-owned banks from raising long-term loans in the EU, ban exports of dual-use equipment for military use in Russia, disallow Russia to engage in arms deals of any sort, and ban Russia’s import of EU’s wide range of oil industry technology.[1] The sanctions particularly target three major oil companies: Rosneft, Transneft and Gazprom Neft, the oil unit of gas giant Gazprom. The gas industry, space technology, and nuclear energy are excluded from sanctions. In essence, what these sanctions aim to achieve is to severely restrict the access of major Russian corporations to Western capital markets.[2] These initiatives, coupled with low oil prices, are expected to deepen the economic recession in Russia.

In response to the sanctions of 2014, Russia imposed a ban on most agricultural imports from Europe, hurting many European farmers and manufacturers.[3]  Russia “welcomed” the news of renewed sanctions in June with a promise of retaliation, namely more import bans from Europe. In August 2015, the Russian government took this promise to a new level: in an appalling, arrogant, and distasteful move, Russia bulldozed a pile of Western-produced cheese, steamrollered tons of European fruit and vegetables, crushed boxes of imported bacon, and burnt Dutch flowers.[4] The Russian government’s actions outraged governments, humanitarian organizations, and general public worldwide, but above all, these actions came as an insult to Russia’s impoverished populations and struggling businesses.

But just how effective are economic sanctions in achieving Western leaders’ goals with regard to Russia’s behavior modification? Typically, sanctions are imposed to achieve a short-term goal, such as generate the desired policy change in the target country, as well as to produce a long-term impact, usually consisting in internal shifts leading to the ultimate overthrow of the undesired government.

While the short-term goals for Western sanctions against Russia have been clearly articulated (disengagement in Ukraine), the West’s long-term position toward Russia seems ambiguous at best. It is not clear what exactly Western leaders are trying to achieve with the imposition of sanctions: do they merely want Russia to re-consider its aggressive behavior toward its neighbors (namely Ukraine), or do they intend to weaken Russia to the extent that it empowers opposition and leads to the replacement of Putin’s government?

Our argument is that the sanctions against Russia are not effective in achieving either.

We have analyzed the sanctions against Russia in the framework of Lektzian and Patterson’s theory of the economic and political winners and losers of sanctions. [5] The authors contend that powerful countries imposing sanctions need greater awareness of the overall economic strengths and weaknesses of the sanctioned state’s economy if they want the sanctions to undermine the political powerhouse responsible for unwanted policies.[6] Otherwise, sanctions may not just fail to achieve their purpose, but inadvertently strengthen the targeted regime and harden its current position.

Applying Lektzian and Patterson’s theory to recent sanctions against Russia, we argue that the sanctions have not been effective in their design and execution for three reasons: (1) the cost of sanctions is lower than the cost of conceding, (2) the economic costs associated with sanctions are felt disproportionately across groups, and (3) increased restrictions to international commerce have fueled nationalism and empowered Russia’s authoritarian regime.

First, while the cost of sanctions has been high for Russia, it is less than the cost of conceding (that is, protecting the regime itself). Russia’s economy took a nose-dive in 2014 with Ruble depreciating by 50 percent and the Central Bank raising rates from 10.5 to 17 percent, effectively sending Russia into a recession.[7] According to the IMF World Economic Outlook 2015, Russia’s output is projected to contract by 3.8 percent in 2015, but in 2016, the economy is expected to be recovering and its output is anticipated to drop only by 1.1 percent.[8] Inflation in Russia is projected to stand at 17.9 percent in 2015 and 9.8 percent in 2016. Currently, Russia is still left with a collapsing currency, soaring interest rates, and panicking citizens.

But for Putin no price is high enough to pay to preserve his empire. As he has amply demonstrated, he has no reservations about sacrificing Russians’ well-being to protect his inner circles and to further his geopolitical ambitions of creating the Eurasian Economic Union. A stable, west-ward looking Ukraine is much more costly to Putin and his cronies than a temporary decline in the Russian economy. Thus, Chrystia Freeland, Member of Canadian Parliament, and a reputable writer, journalist and politician, who was put on the Kremlin’s list of Westerners banned from Russia in March 2015, asserted in her recent publication that Putin’s primary motivation for involvement in Ukraine is not the pursuit of economic and geopolitical gains – it is the fear that Ukraine can prove to her Russian neighbors that a democratic, rule-of-law Ukraine can in fact work.[9] She cites a personal communication with Mikhail Kasyanov, Putin’s former prime minister: “We are similar people. As soon as Russians understand that Ukrainians can be free, why shouldn’t we be, too? That is why Mr. Putin hates what is happening so much, and doesn’t want Ukraine to escape his grip.” Indeed, as Lektzian and Patterson claim, if the cost of sanctions to targeted government leaders is positive, but less than the costs of conceding, then the target would rather face the sanctions than give into them.[10]

Not only did the sanctions fail to impose a sufficiently high price on Russia, but they also disproportionately burdened Russia’s interest groups by hurting the weakest. Disproportionate sanctions are likely to be ineffective if they do not take into consideration how different groups will be affected.[11] By design, Western sanctions targeted Putin’s closest allies, but in reality the sanctions seem to have affected the average Russian more so than the oligarchs. The largest impact of the sanctions has been a sharp increase in prices for foodstuffs (both due to ban on imports and Ruble devaluation), setting Russian consumers into a state of panic and desperation.[12]

Russia’s oligarchs, on the other hand, do not seem to have suffered enough to create any substantial pressure on Putin, despite travel bans and asset freezes. In several cases, Russian companies that would have been sanctioned because of their links to selected Russian oligarchs have managed to avoid restrictions with intricate ownership transfers.[13] By reducing the stakes held by companies subject to sanctions below the required threshold of 50 percent, many business owners avoided penalties.

An example of a beneficiary of this share transfer loophole is Sogaz, a company originally set up by Gazprom. Sogaz provides insurance to Russian companies, many of whom were subject to sanctions.8 All members of the Sogaz board, including Alexey Miller, the head of Gazprom, are linked to a sanctioned party. Until March 2014, 51 percent of Sogaz belonged to Bank Rossiya, Russia’s 17th-largest bank whose owners have close ties to Putin. The remaining shares in Sogaz were split between Gazprom, its subsidiaries, and other entities. When Bank Rossiya was put on the sanctions list in March 2014, Sogaz should have been too, as a company that is 50 percent-or-more-owned by a sanctioned party. But Rossiya transferred a 2.5 percent stake to Sogaz Realty, a subsidiary of Sogaz, shortly before the sanctions went into effect. With Rossiya’s ownership below 50 percent, Sogaz was able to produce sufficient documentation that it was not subject to sanctions. Some of Russia’s biggest banks have also managed to stay afloat by limiting their lending at home and turning to the government for aid.[14] For example, state-controlled Rosneft, Russia’s largest oil producer, once sanctioned, has secured billions in state loans.

Several industries in Russia were not merely unhurt by Western sanctions, but actually benefited from them. These industries include dairy, meat, seafood, condiments and other foodstuff manufacturers.  Due to Russia’s vengeful ban on imports from Europe, locally-produced chicken, seafood, vegetable oil, sugar, and eggs have at least doubled in prices. Inflation skyrocketed to 23 percent, but it was justified by Putin’s government as a necessary evil to protect local producers and enhance Russia’s economic self-reliance. As reported by Nezavisimaya Gazeta (Independent Newspaper), one of Russia’s largest-circulation newspapers, many Russian manufacturers were subsidized by the government because of sanctions and these companies would prefer for sanctions to stay in place.[15] Other beneficiaries of sanctions, riding the waves of glory, are numerous Kremlin-paid propagandist writers, the so-called Russian trolls, social scientists, and other “soldiers” of Russia’s propaganda machine.

These examples demonstrate that the economic costs associated with sanctions that disrupt international commerce were felt disproportionately across groups Russia. While the overall welfare of the targeted state has been reduced, the sanctions have not affected the power groups enough to create a shift in policy. Moreover, certain industries capitalized on the crisis and came out winners. What western leaders might have underestimated is the sophistication of Russia’s internal loopholes to allow companies to avoid penalties. They also miscalculated that despite its participation in international commerce, Russia was a type of a regime that was likely to thrive from limited access to foreign markets, allowing it to “collect monopolist rents”[16] on domestic products whose value exceeded world standards due to a lack of external competition.

Finally, not only have the sanctions enriched certain Russian businessmen, but they also have given the Kremlin political cover with its own people.[17] Putin has successfully blamed Russia’s economic woes on American greed and interventionism; and “the nationalism he peddles as a consolation for domestic woes is flourishing.” In response to the renewed sanctions on June 22, 2015, vice speaker of Russia’s State Duma, Nikolay Levichev, went as far as to say that there was a positive side to the extension of sanctions, as the EU was inadvertently helping to advance Russia’s import substitution programs, for which Russia can only be thankful.[18]

Ironically, both President Putin and the U.S. Secretary of State, John Kerry, use the same sanctions rhetoric for their own ends: Putin attributes Russia’s economic woes to Western sanctions and so does Kerry who stated that “sanctions were responsible for much of Russia’s current economic pain and that the administration stood ready to modify them based on Putin’s actions.”14

Putin’s masterful use of Russia’s crises to strengthen his regime is consistent with Lektzian and Patterson’s claim that “a theoretical and practical difficulty with considering sanctions against trade-closed countries is that in trade closed countries, increased restrictions to international commerce are generally what the politically dominant group desire.”13 In addition, international isolation allows the target government to control ideas and information within their society and nurture nationalism, thereby reducing the chances of behavior modification intended by sanctions in the first place.

All in all, the relatively low cost of sanctions, their disproportionate distribution, and the inadvertent empowerment of the targeted regime have all undermined the effectiveness of sanctions. Ironically, many analysts are saying that much of Russia’s current economic weakness has little to do with sanctions to begin with. The economists attribute most of Russia’s economic problems to a 48 percent drop in the price of oil since June 2014. Some experts contend that problems in Russia would have emerged even if there were no sanctions. Chris Weafer, senior partner at economic consultancy firm Macro Advisory, stated that investors would have been nervous about Russia’s risk and instability even without sanctions and that the major risk was the continuing self-sanctions by foreign investors, businesses and banks: “To a limited extent, the state can substitute for foreign lenders in strategic sectors. However, without a big pick-up in inward investment the economy will not be able to move to the sustained 3% to 4% annualized growth it needs.”[19]

Moreover, not only were the damages from sanctions less than expected by Western countries, but they arguably hurt Western economies even more. According to a study by the Austrian Institute of Economic Research (WIFO), Moscow’s retaliation to EU sanctions could cost Europeans 100 billion euros in economic development and jeopardize up to 2.5 million jobs.[20]

In addition, a year after the U.S. and European Union imposed sanctions on Russia driving it into a deep economic recession, many Western companies have had to pull foreign staff out of Russia. An international law firm that deals with global corporate immigration reported that the number of expatriates applying for new work permits fell 22 percent in 2015.[21] Data from Russia’s Federal Migration Service showed the number of foreigners in Russia from the U.S. and Western Europe’s biggest countries was down 34 percent in January 2015 compared with January 2014. Notably, the oil and natural gas sectors have had the greatest outflow of foreign workers after U.S. and EU sanctions on Russia’s hydrocarbon sectors.17

At the same time, Russia’s pivot eastward for economic and political support could not be coincidental. China increased its import of Russia’s oil by 36 percent in 2014; meanwhile, its imports from Saudi Arabia fell 8 percent and those from Venezuela – 11 percent.[22] In addition, the number of Chinese living in Russia has spiked: migration statistics report a 40 percent increase in the number of Chinese living in Russia from January 2014 to January 2015. The Chinese are buying more property in Russia’s capital, as well as its Far East territories close to Chinese investors’ home.

It is apparent that the sanctions have not been effective in creating a significant enough economic burden on Russia for the West to achieve its short-term goals. Have they been effective in their long-term impact on the transformation of Russia’s authoritarian government?  According to Lektzian and Patterson, sanctions are more effective if they reduce the wealth and political power of governing groups while simultaneously empowering potential challengers.[23] In other words, authoritarian regimes are more likely to make the concessions demanded by the sender country in an effort to end sanctions if the regime itself is threatened.

In Russia, there is no sign of regime being threatened. Quite the opposite, Putin is enjoying a record high 86 percent approval rating and Russian nationalism is on the rise.[24] Lektzian and Patterson maintain that typically if the targeted regime takes no actions to end the policies responsible for bringing about the sanctions, then, over time, it will face increasing pressure as domestic coalitions shift against them. These shifts may either undermine the current regime or inadvertently strengthen it. The latter seems a more likely outcome in Russia at this point. Some opposition leaders say growing economic woes will eventually turn Russians against Putin, but so far, the most anger the sanctions seem to have fueled is anti-American.[25]

Our analysis of sanctions against Russia in the framework of Lektzian and Patterson’s theory allows us to conclude that the sanctions have not been effective in either their short-term goal (withdrawal from Ukraine) or long-term goal (change of regime). This case also demonstrates a gap in the Lektzian and Patterson’s theory with regard to countries imposing sanctions. In international sanctions there are always two parties involved: a side that imposes sanctions and the side that is subjected to them. Yet, in evaluating and predicting the effectiveness of sanctions, the theory focuses exclusively on one side of the equation: the country subjected to the sanctions and whether it is open or closed to trade. We argue that to better understand the mechanism of sanctions and predict their success or failure, one should also categorize parties imposing sanctions.

The case of the Russian Federation presents an excellent opportunity for such investigation. Indeed, the sanctions against Russia are not monolithic but differ quite significantly between the United States, Canada, Australia, Japan, and the European Union. For example, the European Union countries rely on the import of natural gas from Russia. As a result, EU imposed sanctions on the Russian energy sector with one notable exception: the gas industry. Gazprom, a Russian state natural gas company, is not subject to the EU sanctions. What is interesting, however, is that Gazprom’s smaller oil business, Gazprom Neft, is subject to the EU sanctions. The United States, on the other hand, works closely with Russia on space exploration, including relying on Russian rockets to deliver astronauts to the International Space Station and back. But, although space technology is listed as defense technology in the U.S. Munitions List and as such is subject to the U.S. sanctions against Russia, the United States has to make an exception to continue its space program. Still, the main burden for formulating and implementing the sanctions fell on Europe, a party with the most direct and tangible stake in Ukraine’s conflict with Russia.[26]

These examples point to a lack of unity and prevalence of conflicting agendas among the countries imposing sanctions. Consequently, to better evaluate and predict the effectiveness of international sanctions, one should look beyond the country subject to sanctions and how domestic players in that country are affected by the sanctions. In fact, one should put the countries imposing sanctions under the microscope and analyze their specific involvement with the country under sanctions, including international trade, research and development projects, political alliances, and even common history. Thus, Lektzian and Patterson’s theory could be improved by differentiating between countries imposing sanctions to account for various dimensions of their relationship with the target country.  Then, we could examine the interaction between the type of a sanctioning country and the type of a sanctioned country and make more accurate observations as to which combinations are likely to result in more effective sanctions.

Olena Lennon, Ph.D., is a former Fulbright scholar from Horlivka, Ukraine, currently teaching Foreign Policy at the University of New Haven, CT. Her hometown, located in the Donetsk province of eastern Ukraine, has been one of the main strongholds of Russian-backed separatists in the past year. Olena completed her Ph.D. in Educational Leadership & Political Science in the United States and returned to Horlivka for two years to fulfill her Fulbright obligations. Her work appeared in Foreign Affairs, The National Interest, Higher Education in Europe, Foreign Languages, and others.

Alexander V. Laskin, Ph.D., is an associate professor and director of graduate studies at the Department of Public Relations, Quinnipiac University. Dr. Laskin’s research, published in Journal of Public Relations Research, Public Relations Review, Journal of Business Communication, Journal of Communication Management, and others, focuses primarily on investor relations, measurement and evaluation, and international communications. Dr. Laskin also contributed multiple book chapters and published two solo-authored books. Dr. Laskin has significant industry experience in investor relations, international mergers and acquisitions, and marketing research.

JPR Status: Opinion. ​Archived 8/16/2015.

Footnotes:

[1]   “How far do EU-US sanctions on Russia go?” BBC News, 15 September 2014, http://www.bbc.com/news/world-europe-28400218

[2] David M. Herszenhorn, “Russia Assails Extension of E.U. Sanctions in Ukraine Crisis,” The New York Times, 22 June 2015, http://www.nytimes.com/2015/06/23/world/europe/russia-assails-extension-of-eu-sanctions-in-ukraine-crisis.html?_r=1

[3] Paul Sonne and  Anton Troianovski, “Russia Bans Food Imports in Retaliation for Western Sanctions,” The Wall Street Journal, August 7, 2014, http://www.wsj.com/articles/russia-bans-food-imports-in-retaliation-to-western-sanctions-1407403035

[4] “Russia destroys tonnes of foreign food imports,” BBC News, 6 August 2015, http://www.bbc.com/news/business-33814362

[5] David Lektzian and Dennis Patterson, “Political Cleavages and Economic Sanctions: The Economic and

Political Winners and Losers of Sanctions,” International Studies Quarterly, 59 (2015): 46–58

[6] Ibid, 57

[7]  Matt O’Brien, “Sorry, Putin. Russia’s economy is doomed,” The Washington Post, 15 December, 2014, http://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/15/russias-economy-is-doomed-its-that-simple/

[8] International Monetary Fund, World Economic Outlook, Chapter 2, Country and Regional Perspectives, April 2015, http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/c2.pdf

[9] Chrystia Freeland, “My Ukraine,” May 12, 2015, http://www.brookings.edu/research/essays/2015/myukraine

[10] David Lektzian and Dennis Patterson, 47.

[11] Ibid.

[12] Priyanka Boghani, “What’s Been the Effect of Western Sanctions on Russia?” PBS, 13 January 2015, http://www.pbs.org/wgbh/pages/frontline/foreign-affairs-defense/putins-way/whats-been-the-effect-of-western-sanctions-on-russia/

[13] “Sanctions against Russia. Fancy footwork,” The Economist, 14 February, 2015, http://www.economist.com/news/business/21643122-how-businesses-linked-blacklisted-oligarchs-avoid-western-sanctions-fancy-footwork

[14] Michael Birnbaum, “A year into a conflict with Russia, are sanctions working?” The Washington Post, 27 March 2015, https://www.washingtonpost.com/world/europe/a-year-into-a-conflict-with-russia-are-sanctions-working/2015/03/26/45ec04b2-c73c-11e4-bea5-b893e7ac3fb3_story.html

[15] “Import substitution profit has been growing thanks to the conflict with the West,” Nezavisimaya Gazeta, May 25, 2015.

[16] David Lektzian and Dennis Patterson, 49.

[17] Michael Birnbaum, “A year into a conflict with Russia, are sanctions working?”

[18] Mike Wheatley, “Russia Reacts to Renewal of EU Sanctions,” Russia Insider, June 22, 2015, http://russia-insider.com/en/politics/russia-reacts-renewal-eu-sanctions/ri8212

[19] Katie Hope, “What impact will the MH17 disaster have on Russia?” BBC News, July 21, 2014, http://www.bbc.com/news/business-28404988

[20] Elisabeth Christen, Oliver Fritz, and Gerhard Streicher, “Effects of the EU-Russia Economic Sanctions on Value Added and Employment in the European Union and Switzerland,” The Austrian Institute of Economic Research WIFO, June 2015, http://www.wifo.ac.at/en/publications?detail-view=yes&publikation_id=58219

[21] Thomas Grove, “Expats Leave Moscow Amid Russia’s Economic Downturn and Ukraine Crisis,” The Wall Street Journal, June 9, 2015, http://blogs.wsj.com/expat/2015/06/09/expats-leave-moscow-amid-russias-economic-downturn-and-ukraine-crisis/

[22] Daniel Wiser, “China Throws Lifeline to Russia Amid Economic Crisis,” The Washington Free Beacon, January 26, 2015, http://freebeacon.com/national-security/china-throws-lifeline-to-russia-amid-economic-crisis/

[23] David Lektzian and Dennis Patterson, 47.

[24] Saeed Ahmed, “Vladimir Putin’s approval rating? Now at a whopping 86%,” CNN, February 26, 2015, http://www.cnn.com/2015/02/26/europe/vladimir-putin-popularity/

[25] Michael Birnbaum, “A year into a conflict with Russia, are sanctions working?”

[26] Rajan Menon and Eugene B. Rumer, Conflict in Ukraine: The Unwinding of the Post-Cold War Order (A Boston Review Book, The MIT Press, Cambridge, Massachusetts, London, England: 2015), 67.