Sanctions: A Freeway to the New Cold War?

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Since late July, the European Union and the United States have imposed several rounds of sanctions against Russia in response to its involvement in the conflict in Ukraine. Russia has been accused of violating the country’s territorial integrity. The sanctions included freezing the assets of several powerful Russian oligarchs close to the government and preventing them from traveling to the EU.

The sanctions have affected the business of leading Russian companies such as Rosneft and also state banks. Foreign investments in infrastructure, transportation and telecommunication, as well as oil, gas and mineral mining, were prohibited. In addition, the EU banned equipment and technology exports for new projects in deepwater, Arctic and shale oil drilling for one year.

Russia responded to the European sanctions with a food embargo, banning imports of beef, pork, fish, fruit, vegetables and dairy products from the U.S., EU, Norway, Canada and Australia. For both sides, what started as an international attempt to put pressure on Russian President Vladimir Putin and make him reconsider his policies has turned into an economically risky exchange of punches. The diplomatic conflict recently deepened after Russia recognized the November 2 elections in Ukraine’s self-proclaimed republics of Donetsk and Luhansk. The EU considered this a violation of the Minsk Protocol, a peace agreement signed on September 5.

Cain, where is your brother, Abel?" A woman holds a banner at an antiwar march in Moscow in September 2014.

flickr / mochryakovaalbina under Creative Commons

Cain, where is your brother, Abel?\” A woman holds a banner at an antiwar march in Moscow in September 2014.

The effectiveness of sanctions is highly debatable, and the big question is which spheres do they affect the most: European food producers, Russian citizens, the world oil market or currency exchange rates. In 2008, scholars at the Peterson Institute for International Economics, a nonpartisan research institution, studied more than 200 hundred cases of economic sanctions after the First World War. They discovered that only 34 percent of sanctions could be seen as successful, meaning that they had fulfilled foreign policy goals.

The European Bank of Reconstruction and Development predicted that the Russian food embargo will mainly affect the Baltic states, Norway, Poland and Hungary, as their food exports to Russia make a substantial contribution to the countries’ gross domestic product.

Erik Berglöf, a chief economist and special adviser to the European Bank of Reconstruction and Development’s president, said that “the most affected country will likely be Lithuania, where food exports to Russia amount to 2.7 percent of GDP.” Berglöf also noted an increase in inflation in Russia, which will affect other countries.

“Remission of the Russian economy will severely influence the countries of Central Asia and Eastern Europe,” Berglöf said. “Possible banning of the European airlines operating over Russia will affect not only the Russian but also the European economy.”

“Economical motives of sanctions are obviously invented, especially because European companies who are interested in investing money, experience and technologies in the Russian economy are suffering from them,” said Mikhail Krutikhin, an analyst and co-founder of RusEnergy, an independent consulting agency. “Europe wittingly sacrifices in attempt to change Russian foreign policies.”

Krutikhin added that such measures “can become damaging if extended for the longer term.” He said the effects of Russia’s embargo could be a short-term consequence, while changes in oil export policies can lead to long-term ones. If sanctions remain in place, oil drilling in Russia in 10 years will drop almost 30 percent, from 10.5 million to 7.6 million barrels a year, according to Krutikhin. This would happen because of the exhaustion of existing deposits. Under sanctions, developing the Arctic shelf, the Arctic and Siberia for oil exploration will be extremely difficult.

“Before the sanctions were introduced, we could rely on European technologies to stop the decrease of drilling in Russia,” Krutikhin said. “Now we can’t. Previously, RusEnergy predicted the recession in 2016, but we are already witnessing it. What does it mean for other countries? It is pointless to expect the U.S. to export gas in significant volumes in the next five years or so, and even when it happens, American gas will mostly go to Asia, not to Europe.”

According to Vladimir Salamatov, director general of World Trade Center Moscow, Russia used to import 57 percent of its drilling equipment from the countries that have now imposed sanctions against it. In mid-September, Vagit Alekperov, president of Russian oil company Lukoil, informed Russian Prime Minister Dmitry Medvedev that Russian oil drilling is 25 percent dependent on American technologies.

Russia is Europe’s biggest natural gas supplier, accounting for around a third of its needs. The sanctions, which didn’t touch existing gas contracts, have had a negative impact on both Russia and the EU. Economically, neither side is benefiting from the sanctions or is likely to do so in the future. According to Philippe Pegorier, chairman of the Association of European Business in Moscow, a lobbying group in Moscow, “European business interests in Russia are being hurt badly over Ukraine.” For example, German exports to Russia have decreased by 16 percent since the sanctions.

The general prognosis doesn’t look promising. The Russian ruble is at a record low and keeps falling. According to Reuters, “The status of economic sanctions against Russia is closely tied to what happens in eastern Ukraine.” And so far, things haven’t gotten better. Russia has not yet made steps toward meeting American and European requirements.

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