posted September 12, 2014
The Limits of Russian Sanctions & Inevitable Ukraine Settlement

Last week Ukrainian government forces began a full scale retreat from its previously occupied positions in the Donetsk-Lugansk region, as separatists forces went on the offensive and encircled several detachments of the Ukrainian army, threatening their destruction. The response of the USA, EU and NATO has been to consider expanding NATO’s military presence throughout East Europe and to discuss allowing Ukraine to join NATO.

At the same time, as the USA and EU have begun debating their political-military response to the separatists’ gains, they have also begun discussing the possibility of further economic sanctions on Russia, even though it is clear past sanctions have had a growing negative impact on the EU economy thus far.

Meanwhile, the Ukraine economy continues to descend even more rapidly into a bona fide depression, with the IMF publicly admitting in recent days that Ukraine will need billions of dollars more of bailout from the west beyond the $17 billion promised last spring.

On August 27, on the eve of the latest military developments in Ukraine and before the talk of further escalating sanctions, Jack Rasmus gave an interview to the Azerbaijan media group, ‘Vestnik Kavkaza’. Rasmus explained why EU-USA sanctions on Russia have not had, nor will have, that great a negative impact on Russia’s economy and restated why a negotiated settlement on Ukraine would happen by winter. That radio interview is reproduced verbatim as follows.

Vestnik Kavkaza:

“Dr. Rasmus, the President of the U.S. and the Chancellor of Germany believe that the U.S. and the EU should consider the possibility of launching additional sanctions against Russia due to the situation in Ukraine, according to the press service of the White House.

Do you believe that sanctions against Russia have been successful?”

Rasmus:

“I would not say against Russia per say, not the entire Russian economy. They have been very focused in the West on select companies: state banks, military technology and so forth. Although they, EU and US, have announced the possibility of focusing Western sanctions on select industries, that is not really been implemented yet. And, even if they do, it will take some time to determine whether even industry-wide sanctions have been successful or not. If a deal, of course, occurs on Ukraine before the winter, which I believe it will, between the West, Western Europe and Russia, then the sanctions to date will have had very little effect. If you look at Russia’s stock market, sanctions on Russia so far have not had that much of an impact. So, clearly, if the stock market is an indicator, the effect has not been that great. And, to the extent that Russia’s GDP and currency have softened in recent months, that weakness has not been any more than other emerging markets economies and their currencies and GDPs weakening due to effects of other economic developments that have been occurring globally. So, in general I would say that the sanctions have not been that successful to date, because they are not really designed in the first place to create too big of an impact. Further sanctions will have little effect, if a deal is concluded on the Ukraine crisis. In the meantime, certain sectors of the Russian economy, like oil and energy, where Exxon is pushing ahead in Russia with investments and so forth, have not been affected at all. In other words, I don’t see any real negative long term impact of sanctions on the Russian economy.”

Vestnik Kavkaza:

“Could they be counter effective? What the United States and the European Union risk confronting Russia economically in such way?”

Rasmus:

“I think Western Europe has far more significant risks than the US from sanctions. The US economic relationships with Russia are not that significant given the size of the US economy, but, I think, Europe has some very big risk, particularly Eastern EU economies, central Europe and even Germany. They have a big risk, because what we see now, obviously, is that the economy in the Eurozone is flat to negative, and, I think, they might have entered the third recession in as many years. The sanctions have played some role in this European economic decline. I would not say it is the whole cause the EU and Eurozone weakening, but the West’s sanctions played some role there. Estimates are that German exports to Russia have declined by about 15 to 20 percent, and that is not counting German exports to Ukraine that have also collapsed. And, I think, for the year we probably are going to look at a decline in German exports to Russia in excess of 30 percent. Even though Germany’s exports to Russia account to only 3 percent of its total exports, it is still a significant impact on German exports and the German economy at a time when the German economy is already weakening significantly, as is France, Italy and other economies. I think, the negative impact on Western Europe has been and will be far more than on the US. The impact of sanctions is measurable not just in terms of quantitative export-import actual flows, but in money flows, investment opportunities, and in the psychological effect on investment in East Europe and Germany, which is more difficult to measure but is real nonetheless. The crisis in the Ukraine and the sanctions has also had a psychological effect on German and the East European business, which has to be thrown into this total picture of the total impact of sanctions. So, Western Europe is really beginning to feel the bite from sanctions, and that is why, I believe, there will be a settlement in the Ukraine crisis before winter, when gas prices from Russian imports rise and the impact becomes even more severe.”

Vestnik Kavkaza:

“What are counter measures or leverages that Russia can use to apply pressure on the European Union or even the US?”

Rasmus:

“The ability to put pressure on the European Union, of course, is reflected in the counter sanctions that Russia has introduced, which are still mostly agricultural and therefore still limited. Russia is going slow on expanding its counter sanctions just as Europeans are going slow on sanctions on Russia as well. The US wants to step it up, the US wants to put even more pressure, but the Europeans, especially Germany and Merkel, are trying to walk a tightrope between resisting pressure for more sanctions and yet acknowledging the US pressure and agreeing to some sanctions, but the Europeans so far have been very cleverly minimizing the sanctions. So, what can Russia do and what is Russia doing in turn is mostly focusing on relatively minor sanctions, targeting the Western European agricultural area, which is, by the way, probably having more impact on the Eastern European countries than it is on Germany and Western Europe. And then, of course, there is the potential targeting of Western banks by Russia counter sanctions. Eurozone banks are still kind of fragile; particularly those banks exposed to Ukraine and Russia, most of which are Austrian, in the Netherlands and in Italy. Russia can put more pressure on the banking side, perhaps, just as sanctions by the West have been imposed on selective Russian banks. Other Russian counter sanctions could be forthcoming in areas of autos, shipbuilding, airline overflights, aerospace joint projects with the US and the West. So, Russia still has some sanctions it can fire just as the Europeans have, but they both want to hold the fire and see what kind of an outcome can be arranged in the Ukraine, which is also an economic disaster for Western Europe. As I have predicted earlier this year, last March, the Ukrainian economy was going to pretty much collapse this year, which it has. At least 50 billion [dollar] bailout will be needed for the Ukraine economy, not the 18 billion offered by the IMF so far. The IMF is not going to come up with more money and the US will not. The burden therefore is going to be on the Western Europe to continue to bailout the Ukraine, and they cannot afford it right now with their own economies in trouble. So, I think there will be a settlement by winter (I have always predicted that) on the Ukraine crisis, which will pretty much eliminate sanctions on both sides, and you will see the sanctions disappear quickly, and the pressure on the Russian economy will be even less longer term, even though it is not that significant now.”

Vestnik Kavkaza:

“Do you think that the sanctions can have a positive effect on the Russian economy? Maybe the Russians will buy more Russian made products, invest more into their own economy, develop closer ties with the former Soviet republics? For example, Azerbaijan has already said it is ready to provide the necessary agricultural produce to Russian markets.”

Rasmus:

“Yes, I think, it has already begun to happen. Obviously, the huge energy deal with China is one example. I think that Russia has already begun to diversify its economy and its economic relations from dependency to the extent it is now on Western Europe. And you will see more of an effort to establish deeper free trade, common market kind of relationships with the countries to its south and east, and to China. Sanctions will force Russia to trade more with BRICS and emerging markets, and even borrow more from those markets. It will stimulate Russian industry and technology, as Russia reorients its defense sector out of the Ukraine; and, of course, we have the BRICS bank that has just been developed, which will assist Russian economic diversification. I think, you are going to see more trading, as well, with the Yuan and other currencies by Russia. So, all of that are examples of how Russia will turn and is turning already to develop economic relationships with the rest of the world more, and reducing its dependency on Europe. The US policy in the long-term is very short-sighted economically. The US, obviously, exacerbated the situation in the Ukraine early last year for political reasons. I think, there is going to be longer term economic costs to the Europeans, and some to the US, as a result of that short-sighted political strategy. I think you will see Russia diversify more, and develop more common market, and more trade relations with other areas, more banking relationships, more currency relationships. In the long-term it is probably good for the Russian economy – any diversification is always good.”

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