Wednesday, March 19, 2014

Assessing the Costs and Benefits of “Punishing Russia”

New Eastern Outlook
Eric Draitser
March 19, 2014

Source: Severin Nowacki
With the referendum on Crimean independence and possible reunification with Russia now taking place, the US and its European allies have threatened punitive actions to punish Moscow. These measures include the denial of visas, freezing of assets, even possibly commencing economic sanctions against Russia and Russian interests. Such escalation of tensions would undoubtedly have negative, potentially disastrous, effects on the European and global economy, not to mention the all-important political and diplomatic ties between West and East.
On Saturday March 15th, the day before this historic referendum in Crimea, the Washington Post, famously regarded as a principal mouthpiece of the US political establishment, published a strongly worded Op-Ed piece collectively written by the Editorial Board entitled US, EU must stay the course on Russian sanctions over Ukraine. The article laid out a number of punitive actions that the West should, according to the authors, use to punish Russia, including targeted sanctions against prominent Russians in Putin’s inner circle.
Specifically, the authors suggest the denial of visas and freezing of assets of such key Russian figures as Igor Sechin (Chairman of Rosneft), Vladimir Yakunin (President of Russian Railways), and Alexei Miller (Chairman of Gazprom). Such measures must, according to the authors, be combined with “punishment” of Russia diplomatically including exclusion from the G8 and Organization for Economic Cooperation and Development (OECD). Were the US and EU to follow through with these and other sanctions, they would undoubtedly open the door for an effective Russian response – a response that would have dire consequences for the already fragile economic situation in Europe and the US.
 Sanctions and Russia’s Counter-Moves
There are many both in the West and Russia who believe that the suggestion of punitive actions from the US and EU are merely empty threats. However, it is critical to examine just how Moscow might respond to such provocative measures, as sanctions would undoubtedly be seen as a very serious escalation. Moreover, it is essential to consider how the Russian response would impact the entire world.
First and foremost is the fact that Russia holds the key to Europe’s energy future. With Russia providing more than one third of Europe’s gas imports, any sanctions could immediately lead Russia to scale back, or even more drastically, cut off the gas to Europe. This would create innumerable problems for Europe, particularly for the export-dependent economy of Germany, which is unquestionably the economic powerhouse on the continent. With German technology, luxury cars, and the like no longer being produced in the required numbers, the economy would, almost overnight, come to a screeching halt. Moreover, future German energy security would be threatened, as the primary lifeline for the country is the Russian Nord Stream pipeline, which brings Russian gas across the Baltic and into northern Germany.
Additionally, such a scenario would create a tremendous amount of political discord within the EU as countries traditionally friendly with Russia, such as Italy, also heavily reliant on Russian energy, become ever more disenchanted with the belligerent policies of Brussels vis-à-vis Russia and Ukraine. With turmoil already in high gear in Italy, Spain, Portugal, Greece and many other economically devastated countries in Southern Europe, it is unlikely that the political will to go along with a suicidal sanctions regime will remain.
Russia also has a tremendous financial weapon that could be unleashed against the US and EU: their dollar holdings. With the Russian government, not to mention private Russian holdings, retaining a tremendous amount of US dollars, they could easily choose to transfer or dump their dollars and create a veritable panic on Wall St and in Washington. In fact, this scenario may have already taken place on a small scale.