PIIE Blog | RealTime Economic Issues Watch
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
Subscribe to RealTime Economic Issues Watch Search
RealTime Economic Issues Watch

Ukraine-Related Sanctions: Facts and Assessment

by , Cathleen Cimino, and Tyler Moran | May 12th, 2014 | 02:37 pm
|

As Russia continues to threaten Ukraine, the West remains caught up in a historic debate over the sequencing, substance, and effectiveness of possible sanctions to change the calculations in the mind of Russian President Vladimir Putin. The record of sanctions in the past offers some guidance on how policymakers should consider the next steps.

Overview of Sanctions

The sanctions against Russia imposed so far have been fairly minimal. Figure 1 [pdf] shows a timeline for major developments. Both the United States and the European Union have imposed sanctions against individuals with close ties to either the former Ukrainian government or the Russian government, affecting more than 70 individuals, including several members of President Vladimir Putin’s inner circle (see table 1 [pdf]).

In late April, the United States expanded the scope of sanctions to cover 19 companies or entities owned or controlled by designated individuals, but parallel sanctions have not yet been imposed by the European Union (see table 2 [pdf]). The designated firms are primarily concentrated in the financial services, energy, and construction sectors. The US Department of Commerce imposed additional restrictions on licenses for high-technology exports to 13 of these companies.

US-EU Trade with Russia

The European Union’s extensive trade and investment ties with Russia are the source of EU concerns over a likely Russian backlash from heavy sanctions. In 2013, the European Union exported $159 billion in goods to Russia. By contrast, US exports of goods to Russia were $11 billion (table 3 [pdf]).1 The stock of EU foreign direct investment (FDI) in Russia was $243 billion in 2012, compared to $14 billion for the United States. Russian investment on both sides of the Atlantic is relatively minor (table 4 [pdf]), however. While Russia is the European Union’s fourth largest export market, it stands as the second largest supplier of imports, behind China. EU goods imports from Russia are more than 10 times US imports, namely $274 billion versus $27 billion. Importantly for Europe, fuels account for more than 75 percent of total merchandise imports from Russia. Moreover, Russia currently supplies a third of EU oil and gas imports, making energy dependence a leading EU concern, particularly for natural gas.2

As a minor, symbolic measure, on May 7, 2014, the United States “graduated” Russia from “beneficiary status” under its Generalized System of Preferences (GSP), which allows duty-free entry of imports from a lesser-developed country.3  The United States imported $544 million from Russia under GSP in 2012.4 The EU revision of its GSP scheme in 2012 (effective January 2014) already graduated Russia from GSP status along with Brazil, Malaysia, and others that classify as “upper middle income countries.”5

Prospective Impact of Sanctions on the Russian Economy

The recent sanctions, coupled with fears of additional sanctions to come, have undermined investor confidence in Russia. Net capital outflows from Russia were $64 billion in the first quarter of 2014, slightly more than net capital outflows in all of 2013.6  Households and businesses fleeing Russia generally sell off their ruble denominated assets in favor of the euro and the dollar, so the recent surge has contributed to the sharp depreciation of Russia’s currency portrayed in figure 2 [pdf]. The performance of Russian equities, shown in figure 3 [pdf], has faltered as well, falling by more than 10 percent since the beginning of 2014. However, equities rallied in the first week of May after Putin signaled a more conciliatory approach.

As a result of these developments, the International Monetary Fund (IMF) cut back on its forecast for Russia in 2014. Russia’s GDP was expected to grow by 3 percent earlier in 2014, but the IMF reduced this projection to 1.3 percent in early April and cut the figure again to 0.2 percent at the end of April.7 Since the US and EU sanctions have thus far been incremental and limited to high-profile individuals and a few entities, their adverse impact has been felt mainly through declining confidence in the Russian economy and a dip in financial markets.

Russia has suggested that it may challenge the sanctions at the World Trade Organization (WTO) by claiming that the United States is violating the General Agreement on Trade in Services (GATS) ( Articles II, VI and XI).8 But legal scholars believe that Russia is unlikely to succeed at the WTO because the United States could invoke exceptions under GATS Article XIV bis or Article XXI of the General Agreement on Tariffs and Trade (GATT) that permit discretionary measures deemed necessary for national security.  In previous such cases, GATT/WTO decisions have upheld such defensive measures.9 That said, the United States and the European Union may hesitate to invoke national security exceptions for fear of setting precedents that could undermine the WTO rulebook.

Lessons on Sanctions Based on Past Experience

In the third edition of Economic Sanctions Reconsidered (Hufbauer et al. 2009), the authors found that only a third of 204 sanction episodes from 1914 through 2000 fully achieved their goals. Table 5 [pdf] lists past sanction cases in the category of attempts to disrupt military action when the target country is medium-sized or larger, which applies to Ukraine-inspired actions. The success score for these cases ranges only from 1 to 12 on a scale of 16 (where a lower score indicates less success) with an average score of 5.10 Some general lessons can be gleaned from this mixed record.

  1. Don’t overreach. Policymakers should avoid inflated expectations of what sanctions can accomplish. Sanctions seldom impair the military potential or change the policies of an important targeted power. Modest goals contribute to successful outcomes. Thus it may make more sense to achieve the modest goal of thwarting an impending invasion of Eastern Ukraine than to try to reverse the fait accompli of Russia’s annexation of Crimea.
  2. Russian economic integration with the West is an advantage. Economic sanctions are most effective when aimed against close trading partners with more to lose.
  3. Don’t count on Russian public opinion. It is hard to “bully a bully” with economic measures. Democratic regimes are more susceptible to economic pressure than autocratic regimes like Russia.11
  4. Slam the hammer; don’t turn the screw. Economic sanctions are best deployed with maximum impact. Gradually imposed steps may simply strengthen the target national government’s resolve. In the present case, threatening very heavy sanctions if Russian armed forces cross the Ukrainian border has the best chance of deterrence.
  5. International cooperation is not always essential, but in the case of Russia, it probably is. A large coalition of sanctioning countries does not necessarily make the sanctions highly likely to succeed. Financial sanctions against Iran, on the other hand, succeeded in large part because they were backed by an international coalition of countries willing to forgo Iranian oil imports and dealings with Iranian banks. To be sure, the effort to gain international support can dilute their scope. But the United States has little choice but to gain the cooperation of Western Europe in this case.
  6. Choose the right tool. Sanctions deployed in conjunction with other measures, such as covert action or military operations, increase chances of success. So far, the United States has been reluctant to provide substantial military assistance to Ukraine, out of concern that Russia will escalate its own intervention.  Instead, the military dimension of US support has been limited to greater assistance to NATO allies in the region, especially Poland.
  7. Don’t be a cheapskate or spendthrift. Sanctioning governments must balance the benefits against the costs borne domestically to sustain public support at home. At present, the United States, but especially Europe, are facing the resistance of major business firms over the possibility of severe energy and financial sanctions.12
  8. Look before you leap. Sanctioning governments should weigh their means and objectives against unintended costs and consequences.  In the Ukrainian case, all signs indicate that President Obama and his European counterparts (especially Chancellor Angela Merkel of Germany) are giving each step of the sanctions regime their carefully guarded attention.

Reference

Hufbauer, Gary Clyde, Jeffrey J. Schott, Kimberly Ann Elliott, and Barbara Oegg. 2009. Economic Sanctions Reconsidered, 3rd edition. Washington: Peterson Institute for International Economics.

Notes

1. US data on services trade with Russia is not available.

2. However, dependence varies widely by EU member states; for example, for the United Kingdom and Spain, Russia accounts for less than 20 percent of energy, while Eastern Europe relies on Russia for more than 60 percent.

3. See “White House Graduation Of Russia From GSP Tackles One Barrier To Renewal,” May 7, 2014, Inside US Trade (accessed on May 8, 2014). The US statement declared that Russia had “graduated” Russia from GSP status, because “Russia is sufficiently advanced economically that it no longer warrants preferential treatment reserved for less advanced developing countries, consistent with the requirements of the GSP program.” The timing of the announcement, but not the substance, was tied to Ukraine.

4. “Russia Out of GSP,” Washington Trade Daily 23, no. 91, May 8, 2014.

5. The timing of the EU reform likely precludes an underpinning geopolitical motive. See “New GSP as of 2014,” European Commission, March 28, 2014 (accessed on May 7, 2014).

6. Jason Bush, “Surge in Russian capital outflows adds to economic woes,” Reuters, April 9, 2014 (accessed on May 6, 2014).

7. Kathrin Hille, “IMF cuts Russia growth forecast for second time in a month,” Financial Times, April 30, 2014 (accessed on May 6, 2014).

8. Russia claims that, ” ‘[b]locking of assets and prohibition to conduct any transaction within the territory of the U.S effectively mean that the service suppliers are precluded from supplying their services both through mode 1 and mode 3 notwithstanding the specific commitments undertaken by the U.S. in particular sectors.’ ” For detail, see “Russia’s WTO Claims Against U.S. Sanctions Unlikely To Prevail: Experts,” Inside US Trade, April 29, 2014 (accessed on April 30, 2014).

9. The national security exception under GATS has yet to be invoked in past disputes, but the exception under GATT Article XXI has been used six times in GATT/WTO disputes. According to Inside US Trade, in only one case (Nicaragua v. the United States in 1985) did the complainant challenge the use of the exception as a legitimate defense. “Russia’s WTO Claims Against U.S. Sanctions Unlikely To Prevail: Experts,” Inside US Trade, April 29, 2014 (accessed on April 30, 2014).

10. The “success score” of a sanctions episode is an index on a scale of 1 to 16, which is calculated by multiplying the policy result index (which indicates the extent to which the outcome sought by the sender country was achieved) by the sanctions contribution index (which indicates the extent to which sanctions contributed to a positive result). See the notes to table 5 for more detail.

11. However, it is worth noting that the results for cases involving the disruption of military adventures seemed to show the opposite of what was expected in this regard or to show no pattern.

12. For example, see “Corporate Germany Opposes Sanctions,” Wall Street Journal, May 2, 2014, (accessed on May 7, 2014).