Russia vs. the West: The Economic Battle for Ukraine

Conclusion and Policy Recommendations

As this paper has made clear, evaluating real-world cases of economic linkage today can be complex.  This is true both for the sanctions’ economic impact as well as their political and foreign policy impact.  First, a central point of this article is that sanctions may not be one-sided.  Two powers may both be employing sanctions in opposition to each other.  Second, the sanctioning powers may be targeting multiple countries.  In this case, for example, both the West and Russia were targeting not just each other but Ukraine as well.  And Russian sanctions had a very different impact on different Western countries, with some (like the U.S.) feeling little pain, while others (like Norway and Lithuania) were seriously affected.  Again, this is rarely studied in the existing sanctions literature, which tends to focus on the impact of sanctions on one target state.  Third, sanctions may encompass a number of different instruments.  Thus one cannot focus only on trade sanctions or only on financial instruments, as many authors do, but must look at many areas to truly gauge a policy’s impact. 

Once an observer has estimated the economic impact of sanctions, however, the task is not over.  What is the political impact of the sanctions?  Here too, the existing literature has oversimplified matters.  Most studies simply ask, 'has the target given up?'  If that state has not radically changed its offending policies, the sanctions are rated as a failure.  But should this be considered a yes/no question?  One must ask, would the target have taken more extreme actions without the sanctions?  And have they softened the target’s negotiating stance in any way?  These questions may be harder to answer.  Sanctions supporters argue that Russia could easily have conquered all of Ukraine, as Putin threatened.  Yet it shrank back from such a dramatic break with the outside world.  Putin agreed to a ceasefire in Minsk in September 2014, and he conceded the legitimacy of the hated Poroshenko government and the new pro-Western parliament elected in October. An optimist would say that this left Russia as the loser in Ukraine, as it was effectively conceding most of the country to the West.  However, sanctions opponents argue that Putin’s ‘concessions’ are purely cosmetic.  In their view, he has basically won.  He has clear possession of Crimea, with even some of his few remaining domestic critics conceding the point.15 And the conflict in Eastern Ukraine seems to have frozen in place, giving Putin a permanent pressure point to use against the beleaguered government in Kyiv.

What can the Ukrainian sanctions case tell us about broader issues in international relations?  I would argue that this case is likely to be typical of the new world we increasingly face.  The existing sanctions model is based on an outdated world view from the 1990s.  It assumes the U.S. will remain the world’s leading economic power, and will have the ability to impose powerful unilateral sanctions.  The only question asked by this literature is whether Washington can be even more effective by inducing other Western countries, and even the UN, to join it in imposing multilateral sanctions.  On the other side, the target country is presumed to be relatively isolated and economically weak—like Cuba, Serbia, North Korea or Iraq under Saddam Hussein.  At best the only help it can expect is from a few economically motivated ‘sanctions breakers.’

Today, though, we face a different world.  With the rise of the BRICS states (Brazil, Russia, India, China, and South Africa), the West no longer has a monopoly on economic power.  It can face economically powerful opponents.  Thus, the U.S. and its allies may face two unpalatable kinds of cases.  First, they may be attempting to target an economically powerful opponent, much better able to resist than the weak pariah states targeted in the past.  Or second, they may be targeting a weaker state, only to find their efforts blocked by one of these powerful new opponents.  The Ukrainian case is interesting, since it has elements of both problems.  First, the West has found it difficult to successfully undermine Russia economically, since Russia has an economy which is both fairly large—and thus resistant to sanctions—and also has countervailing economic power which it can use for retaliation against the West.  And second, as we have seen, Russia can also use its resources to counter Western efforts to help Ukraine.

As the new BRICS grouping symbolizes, these rising economic powers may cooperate to oppose Western sanctions, making success against any one of them even more difficult.  In the current Ukrainian case, for example, China has seemed to support Russia in several ways.  The two countries signed a major agreement on natural gas sales, offering Russia a new market in case sales to Europe fall (Weitz 2014).  Chinese companies are also often willing to displace Western investors in Russia (Rapoza 2015).  Countries such as Brazil and India, while playing a smaller role, have been happy to replace the West in supplying food and other exports to Russia, and have also offered some investments (Phillips 2014; Pearson 2014).

Additionally, as this case has shown, the West faces another problem:  both the countries it supports (like Ukraine) and the West itself are generally democracies.  The countries it is competing with generally are not.  And, as seen in this case and in the broader literature, democracies may be more vulnerable to economic sanctions.  Since voters can easily and "cheaply" turn out democratic leaders, a small economic downturn may hurt the West, while autocratic leaders can withstand similar pressure.

Who will win out in this case?  As we have seen, Russia is suffering economically, but as yet shows few signs of policy change.  Meanwhile, the West is suffering less, but may lack the political will to continue the contest.  And its ally Ukraine is faring even worse economically than the Russians.  Who will falter first?  The final outcome of the Ukrainian case remains uncertain, and its result will reveal much about the balance of economic power in today’s new, more multilateral world.

Nonetheless, this study also shows that the West should not despair.  How, then, can the U.S. and its allies respond to this challenging new environment?  I would suggest three areas of policy recommendations which could help the West to continue to use economic sanctions effectively even as ‘sanctions battles’ become more common.

First, Western policymakers should continue to use and refine the ‘smart sanctions’ approach, as discussed in the work of authors such as Cortright and Lopez (2002) and O’Sullivan (2003).  This will serve to maximize the bloc’s slowly declining economic clout in world affairs.  Rather than imposing blanket embargoes on targeted countries, the West should target sanctions based on three factors.  First, what are the economic sectors where the target is most vulnerable?  Second, what are the sectors where the West has the greatest economic power?  And third, how can sanctions be structured to impact ruling elites, while minimizing ‘collateral damage’ to civilians?  All of these tactics could be seen, for example, in the Western technology sanctions against the former Soviet Union.  Forbidding Moscow to purchase computers and other advanced technology was effective, since the USSR was rather backward in these areas while the U.S.—along with its European and Japanese allies—controlled most world production of these products at the time.  Also, these products were vital for high-priority state projects in military and other areas, but were not seen or used by the average Soviet citizen.  In contrast, the West generally allowed exports of food and other consumer goods to the Soviet Union—except for the short-lived and unpopular Carter grain embargo.  This allowed America and its allies to portray themselves as sympathetic to the common people of the USSR, which may be one reason why many Russians viewed the West in a fairly favorable light as the Soviet Union collapsed.

Similarly, as shown in this paper, it could be argued that the sanctions against today’s Russia over the Ukrainian crisis have also been relatively ‘smart,’ although, in this case, the vulnerable sectors are different.  Russia today is a capitalist state, albeit one dominated by a small group of politically-connected cronies of President Putin (Dawisha 2014).  Thus, rather than focusing only on technology, the West has used financial sanctions directed against certain individuals and companies.  And with Russia now relying on oil and gas exports, the West has also targeted investment and some specialized technology in that sector.  Again, the average Russian is not directly affected.  In fact, it could be argued that Putin’s regime has harmed the average Russian more, by targeting Western food exports for retaliatory sanctions.  This has resulted in a dramatic rise of food prices, which is very visible to Russian consumers.16

Second, as its own economic power slowly falls in relative terms, the West needs to put more emphasis on coordinating sanctions among many actors.  The first priority should continue to be coordination between the U.S., E.U., Japan, and other traditional allies.  The E.U.’s economy is comparable in size to that of the U.S.  Together, the two control over 35 trillion dollars in GNP, dwarfing even the economy of China (about 10 trillion), let alone that of Russia (2 trillion).  Adding Japan, Australia, and Canada brings the Western total to some 43.5 trillion. 17 If the West can remain united, it can exploit its still-strong role in some sectors, such as finance.  The West still has disproportionate strength in finance, with its control over most of the world’s leading reserve currencies, the dollar, euro, yen, and pound, and most of the world’s large banks and stock markets.18 Additionally, coordination among these countries—while not always easy—remains quite possible, since they largely share common values and priorities in international relations.   This has been seen in the recent sanctions against Russia, where, thanks to patient diplomacy, the West has remained united in opposing the Kremlin.

Additionally, the U.S. must strive to involve even more countries in its dominant economic coalition, notably the rising BRICS powers.  While this can be difficult, it is not impossible—as the sanctions imposed against Iran by the United Nations demonstrate.  China and Russia joined the U.S. and the E.U. in sanctioning Iran, and joined the Western powers in negotiating with Tehran to curb its nuclear ambitions.  While the deal reached with Iran is certainly not perfect and its future remains uncertain after U.S.' withdrawal, it can be argued that it is better than anything the West could have achieved on its own.

Finally, if necessary, the U.S. should remember that it can still sanction unilaterally with some effectiveness, especially when targeting small states and those without powerful outside patrons.  The 18 trillion dollar American economy dwarfs that of most states.  For example, in 2016 only 15 countries in the world had economies above one trillion dollars.19 America’s status as the world’s leading importer makes access to its market a valuable lure.20 And it continues to be the world’s leading aid donor.21 Thus, while acting in concert with others is certainly preferable, especially as America’s relative economic position slowly weakens, it should still be able to use unilateral sanctions in many cases for some time to come.

Randall E. Newnham is a Professor of Political Science at Penn State Berks. He can be reached at ren2@psu.edu.

 

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• 1.This piece will consider both economic sanctions and incentives under the same umbrella, as opposite sides of the same coin. Some literature refers to sanctions and incentives separately, while other authors label these as ‘negative’ and ‘positive’ sanctions.  See the discussion in Newnham (2002), Ch. 1.
• 2.While the literature has innumerable studies of these cases, sanctions by non-Western actors are much more rarely considered.  For example, this bias is seen even in the most authoritative study of sanctions (Hufbauer, et.al., 2007).  This work focuses on 174 cases of sanctions since 1914.  Yet over two-thirds of the cases chosen involve the U.S. as initiating country (118 out of 174).  When cases initiated by the E.U. countries are included, we see that 145 of 174 cases (over 83%) are Western-based.
• 3.On Germany see the classic study by Hirschman (1945). On Japan see Copeland (2014), Chapter 4.
• 4.A well-known example, for instance, is the lengthy economic battle to influence Egypt.  America first planned to help fund the Aswan Dam, but then the USSR took over the project, cementing its influence in Egypt at the time.  Later the US again became Egypt’s dominant aid provider—and the dominant political influence in the country (Burns, 1985).
• 5.See for example the classic debate between Pape (1997) and Elliott (1998). 
• 6.Many opinion polls have confirmed that Putin’s approval rating in Russia skyrocketed after the crisis began.  For example, a February 2015 survey by the Levada Center showed that 86% of Russians approved of Putin (Ahmed, 2015).
• 7.For example, after ten years in the E.U., it was estimated that Poland alone had received about $30 billion in farm subsidies and close to $70 billion in other development subsidies.  When one considers that a similar amount was budgeted for the 2014-20 period, one author described this as roughly “double the Marshall Plan” (Ministry of Treasury, Republic of Poland 2014, and Adkoya, 2014). 
• 8.To some extent this is now occurring, as Ukraine’s Association Agreement with the E.U. takes effect.  For example, a number of factories have already opened in Western Ukraine, using local labor (at salaries about 1/8 those in the E.U.) to produce products for the European market (Kramer, 2016).  Of course, as will be discussed below, any such gains must be balanced against the costs of declining access to Russian markets.
• 9.According to World Bank figures, in 1992 Poland’s GNI per capita was $2,040, slightly larger than the $1,420 estimated for Ukraine.  However, by 2013 Poland’s GNI was $13,480 per person while Ukraine’s was only $3,800.  Poland was almost four times more wealthy.  Since then, Ukraine’s economy has worsened greatly, tilting the ratio further in Poland’s favor.  In 2015 Polish GNI per capita stood at $13,310 and Ukraine’s had dwindled to $2,640, meaning typical Poles were over five times better off than their eastern neighbors.  All figures from http://data.worldbank.org.
• 10.In fact, the final collapse of the regime was precipitated in large part by its loss of authority in Western Ukraine, notably the seizure of thousands of weapons from police stations in the Lviv area on February 18, 2014.
• 11.As an example of how difficult this process will be, however, the Union decided to postpone full implementation of the trade accord until 2016 after Russia threatened to close its market to Ukrainian goods if the agreement went ahead. 
• 12.In 2013 the Ukrainian GDP at official exchange rates was only $175.5 billion, while Russia’s stood at $2.113 trillion, 12 times larger (figures from the CIA World Factbook).
• 13.This act was named for Sergei Magnitsky (a Russian lawyer working for American investor Bill Browder), who died in detention in 2009.  Magnitsky had been jailed as part of what most observers believed was a trumped-up investigation into Browder’s firm.  The U.S. law imposed travel bans and asset freezes on 18 Russians involved in the Magnitsky case, and Russia promptly banned 18 Americans (Shevtsova and Kramer, 2012).
• 14.There are certainly exceptions: Poland and the Baltic states, for example, for obvious historical and geographic reasons, are much more worried about the Russian threat than states such as Italy, Greece and Spain.
• 15.Alexei Navalny, widely seen as Putin’s most credible opponent at home, also now believes that there is no real chance for Crimea to return to Ukraine (Mackey, 2014).
• 16.Prices on some items reportedly almost doubled in 2014-15, due both to increased scarcity and the fall of the ruble against other currencies.  For example, coffee jumped almost 80%, carrots 75%, and tea almost 70% (Tavernise, 2015).
• 17.Figures are 2014 estimates of GNP at official exchange rates, from CIA World Factbook. Available from:  http://www.cia.gov.
• 18.The IMF data on foreign exchange reserves worldwide (first quarter 2015) shows the U.S. dollar making up 64.1% of reserves and the euro 20.7%.  Adding the yen, pound, and Australian and Canadian dollars gives a Western share of reserves of at least 96.7%.  (International Monetary Fund, Current Composition of Official Foreign Exchange Reserves (COFER). Available from: http://www.imf.org.
• 19.International Monetary Fund, World Economic Outlook Database. Available from: http://www.imf.org.
• 20.The U.S. led the world with some $2.38 trillion in imports in 2014.  CIA World Factbook. Available from: http://www.cia.gov.
• 21.In 2013 the U.S. gave $31.55 billion in Official Development Assistance (ODA), more than any other state.  Equally importantly, virtually all of the other major donors are U.S. allies, meaning that a coordinated Western increase or decrease in aid to a targeted country would be very effective.  OECD, Net ODA from DAC and Other Donors in 2013.  Available from: http://www.oecd.org.

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