Putting the squeeze on Russia

The West is still struggling to come up with an attention-getting response to what appears to be Russia’s creeping annexation of Ukraine. While unrest and instability in Crimea and eastern Ukraine have provided the pretext for the extension of Russian interests, the overt use of military force by either Moscow or the West does not appear to be in the cards.

The United States and Europe have instead responded with economic sanctions, a punishment that is neither as visible nor as demonstrative, but could yield more powerful results — if done properly.

While the origins of the mysterious balaclava-clad forces that seized control of Crimea and demanded a return to Mother Russia remain unclear, Western policymakers have concluded that Moscow is responsible for their actions.

In response to the annexation of Crimea, Western governments enacted economic sanctions that targeted individuals close to Russian President Vladimir Putin and some of their businesses. The spread of unrest to wider swaths of eastern Ukraine suggests that the Russian calculus has not been altered. Sanctions have since been expanded and the Russian economy is beginning to feel the pain.

While the sanctions remain targeted, the prospect that they will spread has introduced uncertainty into the Russian economy. The result has been unprecedented capital flight — $63 billion in the first quarter of 2014, more than all of the previous year’s capital flight combined — which has pulled the rug out from under the ruble.

The Russian currency has fallen nearly 9 percent in value this year and the stock market is down 13 percent. The Central Bank has been forced to twice raise interest rates, and the country’s credit rating has been cut to one level above junk. The International Monetary Fund has reduced its economic forecast for Russia in 2014 from 1.3 percent expansion to just 0.2 percent and anticipates just 1 percent growth in 2015. Indeed, the world financial institution has concluded that the country has already fallen into recession.

At this point, it is relatively easy for Putin to shrug off those penalties. The Russian people are accustomed to hardship, and the reclamation of Crimea, along with the prospect of winning back eastern Ukraine, appeals to deeply felt nationalist sentiment.

Ukraine is considered an integral part of Russia — the operative word is Novorossiya, a phrase from the 19th century that means “New Russia” — and a prize worth sacrificing for.

Still, a protracted downturn could undermine the social contract that Putin has forged with the Russian people, one in which they limit their political participation (and support him) in exchange for a steadily rising standard of living and international stature. The Ukraine gambit puts both at risk.

While older Russians may be prepared to tighten their belts, young Russians are accustomed to international mobility. Tougher sanctions threaten that lifestyle, especially if they hinder access to capital.

Similarly, it is hoped that targeted sanctions on the president’s inner circle will force those confidants to reconsider their support for Putin’s expansionist agenda.

Success, however, demands consistency and a united front. Thus far, there has been solidarity among the West, but that is only because the sanctions have not been extensive. Ratcheting up their intensity risks spreading the pain as well, but this time to those in the West.

While specific U.S. companies will be affected, less than 1 percent of overall U.S. trade is with Russia. The situation in Europe is different: Russia supplies 30 percent of Europe’s natural gas, and Russia is the European Union’s third-biggest trading partner, with total trade exceeding $500 billion.

There has already been a sharp drop in German factory orders as a result of “geopolitical events.” France is reluctant to terminate contracts for Russian warships, and Britain is fearful of losing the capital that Russian emigres have brought to London. More extensive sanctions, especially those that target the valuable energy and commodities sectors, could do great harm to Russia, the West and global markets.

Not surprisingly, recent meetings among officials from both sides of the Atlantic — at which the prospect of stepped up sanctions were discussed — have been characterized as “exceptionally tense.”

In a hedge against Western unity, Russia is exploring more extensive contacts and trade relations with Asia. Moscow sees Beijing as an especially valuable partner. China’s hunger for raw materials to power its economy could substitute for Western demand.

While Moscow and Beijing have talked about a multipolar world for years and played up a “strategic partnership” that they envision as a means of countering “U.S. hegemony,” both have demonstrated more interest in relations with Washington than with each other.

Putin’s trip to China later this month will provide insight into how that bilateral relationship can evolve in a world that is more suspicious of, and hostile to, Russia. A reinvigorated Russia-China relationship has long been a nightmare for strategic planners in Japan and elsewhere, but the impulses that created friction between Russia and the West are likely to assert themselves in relations with China as well.

Western governments should remain committed and continue to show their resolve. Russian aggression must not be ignored or rewarded.

  • http://www.facebook.com/people/Boon-Tee-Tan/1068880297 Boon Tee Tan

    Do not try to squeeze Russia too hard. The west is unwittingly forcing Russia to move east, inching closer to China and Korea, though not necessary Japan. When Beijing and Moscow synchronize their moves, the west will not like it.