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More Severe Sanctions on Russia Are Needed

by | March 21st, 2014 | 02:26 pm
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The most recent sanctions imposed by the United States on Russia on March 20 were a step in the right direction after earlier signs of timidity. But Washington needs to impose even more severe sanctions against Moscow and to do so instantly. The reason is that Russia today represents a specific and imminent military threat. An incremental approach such as the one employed with Iran or South Africa will not work in this case, because the threat of war in Ukraine is an immediate one. To deter President Vladimir Putin from an invasion into mainland Ukraine, something he is obviously preparing for, the United States and the European Union need to raise the cost of his defiance dramatically.

Needless to say, a war in Ukraine would be costly and unpredictable for all. As I have previously written, Putin in his March 18 speech used the rhetoric of Nazi Germany in 1938, so the free world must make sure that we do not arrive at 1939. Accordingly, all sanctions short of war are appropriate. Putin’s speech made it impossible for him to withdraw Russian troops from Crimea without losing face, so there is no need to find a face-saving way out of this crisis, as some have suggested.

Another common argument in Washington is that the West should be restrained because there remains a need for help from Moscow on other matters, including Iran. But that consideration has been obliterated by the military annexation of Crimea. The Treaty on the Non-Proliferation of Nuclear Weapons (NPT), a cornerstone of the Obama administration’s foreign policy, has lost meaning after Russia’s aggression. In December 1994, Ukraine—then the world’s third strongest nuclear power—agreed to give up all its nuclear arms in the Budapest Memorandum. Its abandonment of these weapons was a great achievement of the NPT. But Russia’s security assurances in that memorandum have proved futile. Now Ukrainians may draw the logical conclusion that it was a major mistake to give up their nuclear arms, because if Ukraine still had them, Russia would never have attacked. This conclusion will not be lost on Iran or other potential nuclear powers. Thus, the United States has little else to discuss with Moscow until Russia ends its military aggression against Ukraine.

There is no point in building up sanctions gradually. Instead, the West needs to come up with truly devastating sanctions upfront, an economic version of the Powell Doctrine of overwhelming force—”shock and awe”—because the alternative is a devastating major war in Europe. The mere threat of further tough sanctions will not convince Putin after the fiasco of the “red lines” drawn in Syria, which eroded President Obama’s credibility in Russian eyes and the eyes of the rest of the world.

Fortunately, Obama’s new sanctions against 20 more senior Russians closer to Putin, announced on March 20, were a major step forward after the truly laughable sanctions against Russian officials announced three days earlier, on March 17. These earlier steps produced a good laugh in Moscow, where Russian stock indexes rose by six percent. Having put in place the relevant instruments for sanctions, the United States and the European Union have moved ahead. Following the Obama announcement on March 20, the European Union sanctioned 12 Russian lesser officials already sanctioned by the United States. The more sensible sanctions on March 20 hit the Putin cronies, but they caused the Moscow Stock Exchange to fall by just 2 percent. The United States needs to go further and to put pressure on Europe to follow suit, lest the Europeans look embarrassingly indifferent to their own freedom.

The genius of the new US action is that it focuses on the inner Putin circle. It exposes his three key commercial cronies—Gennady Timchenko, Arkady Rotenberg, and Yuri Kovalchuk. This crony circle of Putin’s is at the pinnacle of corruption in Russia. The US sanctions have severely disrupted the businesses of Timchenko and Kovalchuk. The main business of Kovalchuk’s Bank Rossiya is to purchase financial and media assets cheaply from Gazprom. This is no real bank but a holding company for assets stripped from state corporations. The US action prohibits Americans from any financial dealings with it. That step should have been carried out long ago, to prevent money laundering. Visa and Mastercard have immediately ceased all relations with Bank Rossiya. Timchenko felt forced to sell his share in the oil-trading company Gunvor. If the United States can do something to clear this stench of corruption, the real Russia should be most grateful. It is doubtful that the business of Kovalchuk and Rotenberg would stand the test of any objective court scrutiny.

These sanctions should force the European Union to go still further. The European Union receives about half of Russian’s exports, compared to the United States, which is the destination for only 3 percent of Russia’s exports. Accordingly, the European Union should use this leverage despite some obvious problems. Both Timchenko and Boris Rotenberg (Arkady’s younger brother) are citizens of Finland, an EU member. Timchenko lives in Geneva and Boris Rotenberg in Finland. The sanctions against these two men put the European Union on the spot. Finland has no desire to defend these two men, and the all too tolerant EU attitude toward corrupt Russian officials will have to change.

A realistic next package of significant sanctions should focus on the very weak financial sector of Russia. Because of pervasive top-level corruption in Russia, its real financial market is located abroad, essentially in London. At present, state corporations account for about half of Russia’s corporate sector, and they are also endemically corrupt. The United States and the European Union should aim at freezing out all the Russian state corporations from international finance, as has been done with Iran. Apart from Putin cronies, other parts of the private sector should not be sanctioned, because private money should be allowed to flow out of Russia. To be effective, such actions must be carried out instantly.

If financial sanctions do not have sufficient effect, the United States needs to go after the Russian energy sector, which is also very vulnerable at a time of slacking demand and rising production. Europe can now manage without Russian gas, and banning natural gas imports would instantly eliminate some 15 percent of Russia’s export earnings. Next, the United States can release oil from its Strategic Petroleum Reserves, which the energy consultant Philip K. Verleger assesses can reduce the global oil price by about ten percent. A price reduction would cut into Russia’s export earnings still further.

President Putin has so far received a free ride, and he is likely to enjoy it for as long as possible. What the Kremlin has forgotten is that its GDP is a tenth of the EU GDP, and European defense expenditures are not only far larger but also much less corrupt than those of Russia. It would be folly for Putin to challenge Europe in a real war, but one cannot count on Putin thinking rationally about such a prospect.

Europe therefore needs to rearm quickly, but war can be avoided only if the West applies its economic, technological, and political strength.