COSTS OF A NEW
COLD WAR
The U.S.-Russia
Confrontation
over Ukraine
Paul J. Saunders, Editor
COSTS OF A NEW COLD WAR:
THE U.S. RUSSIA CONFRONTATION OVER
UKRAINE
Paul J. Saunders, Editor
September 2014
CENTER FOR THE NATIONAL INTEREST
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Copyright 2014 Center for the National Interest. All Rights Reserved.
Costs of a New Cold War: The U.S.-Russia Confrontation over Ukraine
Paul J. Saunders, Editor
Center for the National Interest
1025 Connecticut Avenue, NW, Suite 1200
Washington, DC 20036
Phone: (202) 887-1000
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TABLE OF CONTENTS
OVERVIEW: TOWARD A NEW COLD WAR?
1
RUSSIA’S ASYMMETRICAL RESPONSE:
GLOBAL AIKIDO
9
THE DANGERS OF A NEW CONTAINMENT
POLICY FOR RUSSIA
25
TARGETED SANCTIONS WITH AN UNCLEAR
TARGET
39
RUSSIA, UKRAINE, AND U.S. ECONOMIC
POLICY
51
By Paul J. Saunders
By Fyodor Lukyanov
By Thomas Graham
By Igor Yurgens
By Blake Marshall
TOWARD A NEW COLD WAR?
BY PAUL J. SAUNDERS
Relations between the United States and Russia have steadily deteriorated
since the collapse of Viktor Yanukovych’s presidency and Russia’s
subsequent annexation of Crimea and support for separatist rebels in eastern
Ukraine. After just a few months, the ties between Washington and Moscow
have unraveled remarkably rapidly, reaching a level of tension unprecedented
since Russia’s independence in 1992. And the crisis continues to get worse—
on an almost daily basis. This leads to two important questions. First, how
bad can the U.S.-Russia relationship get? More significantly, what could be
the consequences of this deterioration for U.S. vital interests?
Relations between Washington and Moscow are arguably already worse than
U.S.-Soviet/Russian relations at any time since 1986, when Ronald Reagan
and Mikhail Gorbachev established the practice of wary but constructive
cooperation that steadily improved during Reagan’s remaining years in office
and throughout the George H.W. Bush administration. Moreover, mutual
expectations between 1986 and 1992 were cautious yet positive, while today
they are cynical and negative. How long will it take for both sides to begin
acting and talking as if it were 1984 rather than 2014? The clock hands seem
to be spinning backwards.
U.S.-Russian and European-Russian differences over Ukraine are clearly
driving this process, though the Ukraine crisis followed years of growing
frustration on all sides. At the time of this writing, the United Nations
estimates that the death toll in the ongoing fighting in eastern Ukraine has
recently doubled within two weeks’ time, to over 2,600, with more than 6,000
wounded.1 Although Ukrainian government forces appeared increasingly
successful on the battlefield during much of August, the separatists reversed
this momentum at the end of the month, possibly with direct Russian
assistance. Though a shaky cease-fire is now in place, new fighting would
raise inevitable and appropriate questions about U.S. and NATO military aid
to Ukraine’s government.
Meanwhile, the United States and the European Union have announced
further economic sanctions on Russia in an apparent effort to strengthen
1John
Revill, “Civilian Death Toll in Ukraine Rising, U.N. Report,” The Wall Street Journal,
August 29, 2014, http://online.wsj.com/articles/civilian-death-toll-in-ukraine-rising-u-nreport-says-1409299965
Saunders
Kiev’s weak hand in talks. For its part, Moscow has threatened a variety of
retaliatory measures. President Vladimir Putin has also announced a major
restructuring of Russia’s military-industrial complex—taking personal
charge—and called for widespread modernization of Russia’s military.2 Even
with talks underway between Ukraine’s government and rebels, the United
States and Russia continue to escalate their actions and rhetoric.
While it is too soon to predict the course or outcome of the negotiations, the
rebels appear to be in a strong position (with Russia’s support) after
Ukraine’s acceptance of a cease-fire in place. If the conflict resumes, the
Kremlin need only avoid allowing Kiev to defeat the separatists; merely
sustaining the insurgency will be sufficient to enable Russia to achieve its
objective of forcing Ukraine’s government to provide greater autonomy to
the Russian-speakers in the country’s eastern and southern regions. Already
committed to expending $20 billion over the next five years to integrate
Crimea3—which it seized largely intact—with Russia proper, Moscow is
unlikely to seek annexation of a region devastated by civil war when it could
instead consolidate its influence there while ensuring that financial
responsibility for the territory and its residents remains with Kiev, Brussels,
and Washington. This would produce further incremental expansion of
Russian aid to the rebels (rather than a large-scale invasion) and could lead to
a long and grinding conflict in Ukraine. At best, it could produce an enduring
stalemate with daily civilian casualties and dangerous possibilities for new
tragedies like the downing of Malaysian Airlines Flight 17.
Unfortunately, it would be a mistake to assume that a Ukrainian defeat of
rebel forces—which Moscow seems unwilling to permit—would obviate the
escalation danger. If the so-called People’s Republics in Donetsk and
Luhansk should collapse, a deeper crisis between the U.S. and Russia could
well follow. Most immediately, how would the Kiev government treat
defeated rebel leaders, soldiers, and sympathizers? Would Ukraine’s military
and police protect Russian-speaking civilians in eastern Ukraine from the
reprisals that are all-to-common after civil conflicts? What political
conditions would Ukraine’s government impose – and how would Moscow
react?
More broadly, how would the United States react to a Ukrainian military
victory? Would the Obama administration attempt to calm U.S.-Russian
“Meeting on drafting the 2016–2025 State Armament Programme,”
http://eng.kremlin.ru/news/22930.
3 "Crimea, Sevastopol to Get 700 Billion Rubles for Development in Next 5 Years," ITARTASS News Agency, August 7, 2014, http://en.itar-tass.com/economy/743917.
2
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Toward a New Cold War?
tensions and revoke American sanctions while Moscow still controls Crimea?
Or would the administration continue to pressure Russia in an effort to
return the Peninsula to Kiev’s control? After achieving victory, how would
Ukraine’s government handle delicate post-conflict issues like demobilization, reconciliation, and reconstruction? How will citizens in eastern
Ukraine react? And how would Russia react? How would Putin respond
internationally and domestically to the humiliation of defeat?
Conversely, if current negotiations produce an agreement on autonomy that
looks like a defeat for Ukraine, how will the United States and NATO
respond? Would Russia contribute economically to reconstruction in new
autonomous regions in Donetsk and Luhansk? It would be much less
expensive that taking full responsibility for the costs, as would be required if
Russia annexed the territory, and could have strong symbolism. How would
the West view this? Would it look like expanding Russian influence in
Ukraine? This is another path to enduring confrontation.
Since we cannot predict the future with certainty, it is impossible to answer
these questions definitively. What is clear, however, is that without a
comprehensive political settlement, there are many plausible paths to
escalation and further crisis in U.S.-Russia relations.
Some argue that this matters little because Russia lacks the capability to
seriously threaten or harm vital U.S. national interests, and that American
resolve could deter such efforts by imposing much greater costs on Moscow.
Moreover, they argue, the high stakes in Ukraine justify any risks possibly
entailed in directly and immediately confronting Russia. Conversely, some in
Russia argue that America lacks the will to confront Moscow or that U.S. and
Western action will do more damage to America and its allies than to Russia.
The question of what is at stake for the United States in Ukraine—and the
related one of what the Obama administration is willing to do about it—have
been topics of considerable debate, and the answers will ultimately become
clear as America’s political system translates this debate into action (or
inaction) over time. The goal of this publication is to illustrate the costs that
any further unraveling of the U.S.-Russian relationship may have for both
Washington and Moscow in light of some of the policies that each
government may pursue.
The intent is not to make threats but to present reasonable or even likely
policy pathways should Washington and Moscow settle on confrontation
rather than the more challenging process of de-escalation and re-engagement.
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Hopefully this may encourage all sides to reduce tensions in order to limit
damage to their own interests. These papers do not attempt to propose any
particular solution to this extremely complex problem.
This volume presents two American perspectives and two Russian ones on
U.S. and Russian policy options in an environment of deteriorating relations.
The two U.S. authors, Thomas Graham and Blake Marshall, outline
America’s possible political/security and economic responses, respectively.
The two Russian authors, Fyodor Lukyanov and Igor Yurgens, assess
Russia’s potential policy responses, with the same division of labor. All four
authors have extensive, multifaceted experience with the U.S.-Russia
relationship.
The overarching conclusion of the four papers is that both the U.S. and
Russian governments are likely to believe that they possess acceptable policy
options to not only confront one another but to impose significant costs on
the other party if necessary. However, one foundation of this judgment on
both sides is a failure to recognize the potential price that their own nation
may pay in a direct conflict or (more likely) in a long-term adversarial
relationship.
On the U.S. side of this equation, Graham outlines a combination of changes
in NATO basing and force posture, expanded missile defense deployments,
new security cooperation with Russia’s post-Soviet neighbors, and efforts to
restrict Russia’s access to defense and energy technologies, among other
likely measures. Considering how Russia’s leaders have defined the country’s
security over the last two decades—in speeches, interviews, and statements
responding to events, as well as in formal doctrine and guidance to defense
officials and diplomats—the security moves that Graham outlines could
dramatically worsen Russia’s overall security environment. If NATO
members simultaneously increase their defense spending and pursue greater
military integration—strengthening NATO’s capabilities by eliminating
duplication—Moscow would face a more powerful NATO.
Meanwhile, while not without cost to the United States and especially to
European countries, the harsh economic sanctions that Marshall describes
could significantly damage the Russian economy. If America is able to help
the European Union to reduce its energy imports from Russia, it would
further increase the impact of sanctions. Gazprom may well be able to find
other customers, but it would be costly and time-consuming to build new
infrastructure—and the company might find it difficult to get customers
willing to pay European-level prices (particularly if Gazprom’s prospective
4
Toward a New Cold War?
partners gain negotiating leverage due to Russia’s partial isolation). The
global nature of the oil market would make it harder to deny revenue to
Russia’s major oil exporters, but technology restrictions could cut into oil
production over time. Though Marshall does not mention the option, the
U.S. Congress could also impose sanctions on third countries, targeting firms
that trade with Russian companies. Congress has taken this approach to
sanctions against Iran in the past.
Even with $500 billion in reserves, Russia could not indefinitely sustain its
current government budgets under heavy economic pressure. Further, the
potential that investors will begin to sense that Russia may be in trouble
could produce high volatility and sharp drops in markets, whether for
currency, debt, or stocks.
From a Russian perspective, Lukyanov argues that Vladimir Putin will seek to
use America’s size and power against it in a form of geopolitical judo. He
argues that Putin may be reluctant to foment instability in countries like
Afghanistan—where spillover could affect Russia. Instead, Putin will seek to
rally governments troubled by U.S. conduct to form a coalition to press for
an overhaul of global governance and institutions that would weaken
American and Western dominance. Beijing would be a key player, he
suggests, in addition to other large emerging economies and any other
governments dissatisfied with the political, economic, or social/cultural
consequences of globalization. Moscow could catalyze this process by
developing and articulating a new ideology based on equality and justice
among nations.
Further, Lukyanov writes, it may be enough for the Kremlin to cease its
cooperation with Washington in the security sphere, rather than actively
opposing the United States. For example, he suggests, Putin saved America
from another costly and unpredictable war in the Middle East (or from a
humiliating retreat from President Obama’s “red line”) by facilitating an
agreement on Syria’s chemical weapons. International expectations of the
United States have grown to such an extent that they are both hard to fulfill
and hard to ignore. Without Moscow’s help, America may face more and
more embarrassment.
Yurgens thoroughly assesses the challenges to Russia’s economy entailed in
any extended confrontation, but adds that the longer the crisis continues, the
more the influence of Russia’s “neoconservatives”—whom he defines as
foreign policy hawks content with economic isolation from the West—will
increase. Concurrently, the political constituency in Russia favoring economic
5
Saunders
engagement will suffer the most from Western sanctions and will lose
influence, especially if the United States and the West refuse to offer any
carrots to facilitate a settlement in Ukraine. As a result, Yurgens asserts,
Moscow’s policy is likely to become less economically rational over time, as
Russia’s economic integration with the United States and the EU assumes
diminished importance in Russian politics and in Kremlin decision-making.
In addition, Moscow will have to look harder for new markets and new
lenders, he says. Notwithstanding its reluctance to become dependent upon
China, he continues, Moscow will likely see this as “the lesser of two evils” if
relations with the West remain strained.
Yurgens also outlines existing proposals to reduce Russia’s economic ties to
the West. Moscow’s options would include: moving dollar- and Eurodenominated assets out of NATO countries to neutral nations, returning
state-owned property to Russia, halting exports of strategic metals and
minerals, shifting trade to barter trade or settling transactions using nonWestern currencies, taxing capital flight, establishing a domestic electronic
payment system, and a number of other steps. Actions like these would of
course have real impacts inside Russia, but would nonetheless impose costs
on Western financial institutions. Although Yurgens does not address the
risks of nationalization, Western firms would be ill-advised to ignore that
possibility if an escalating military conflict prompts U.S. and European
sanctions intended to cripple the Russian economy.
One key point emerging from all four papers is that it is impossible to fully
assess the consequences of an enduring U.S.-Russia confrontation without
considering responses by other key actors, including the EU, NATO, major
European governments, and China. American and Russian policy rests on
certain assumptions about Europe and China that analysts should
acknowledge. On the U.S. side, for example, likely U.S. security policies—
reinforcing security ties to NATO allies, expanding missile defense, and
increasing defense cooperation and military deployments along Russia’s
frontiers—would require a generally unified Europe prepared to risk
sustained confrontation. U.S. efforts to isolate Russia economically may
actually require an even greater level of coordination with Europe (since its
economic relationship with Russia is an order of magnitude larger than is
America’s and Europe would shoulder most of the costs). Fully isolating
Russia economically would also require cooperation from China.
Conversely, given the huge military and economic disparities between the
United States and Russia—much less those between the West as a whole and
Russia—Moscow’s probable policy course of action depends upon rapidly
6
Toward a New Cold War?
expanding trade and investment ties with China and other emerging
economies. Russia would also require sufficient dissension within NATO to
prevent the most threatening Alliance moves—e.g., deployment of groundbased anti-missile interceptors in Central Europe, which Russian military
leaders have said would undermine their ability to deter a nuclear attack.
Without the former, Russia’s economy could face significant and lasting
damage;; without the latter, Russia’s security environment could deteriorate
sharply. A logical strategy for Moscow would be to continue its past efforts
to court China while dividing Europe.
Graham’s, Lukyanov’s, and Yurgens’ papers each address Russia’s relations
with China and articulate prevailing perspectives in Washington and
Moscow. In the United States, for example, Graham writes that closer energy
cooperation with Beijing “is not without serious risk” for Russia, because
Moscow would be in a relatively weak bargaining position. Nevertheless,
Lukyanov argues, China may welcome and support Russian attempts at a
global realignment that consolidates cooperation among governments
opposed to Western concepts of world order and is combined with
progressive social values. Indeed, although Beijing may be unwilling to lead
such an effort itself, its tacit encouragement—and willingness to settle
transactions in currencies other than the dollar or the Euro, among other
measures—could have significant consequences over time.
In Europe, Russia may find it more difficult to exploit internal differences
there, particularly after the MH17 disaster, which appears to have unified and
hardened public opinion and official policies. That said, even during the
height of the Cold War, the Soviet Union was often able to find and
exacerbate points of tension within NATO. Given its power and its distance
from European Russia, the United States has historically been more willing
to pursue confrontational policies than many of its allies. Moreover, the
longer the current confrontation lasts, the more actual and potential
differences within the West will emerge; it will not be easy to sustain
consensus-based policies indefinitely, particularly when they have disparate
impacts on individual nations. Of course, aggressive Russian policies can
(and have) overcome this, at least for a time.
What both Washington and Moscow would do well to recognize is that their
relationship has entered unchartered territory. The U.S.-Russia relationship
has returned to the 1980s in its temperature, but not in its management—
contacts between officials are more limited, the informal rules and patterns
of the Cold War have been forgotten, and the combination of globalization
with the information revolution and changing norms and priorities (especially
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Saunders
in the West) has made our bilateral relations harder to understand or predict.
From this perspective, the late 1940s and early 1950s, a time when the two
governments were just beginning to figure out how to deal with one another
through a succession of trial-and-error experiments, may provide a better
analogy. Even after over a decade into that process, the two sides came
dangerously close to a war during the Cuban Missile Crisis.
Today, Russia lacks the Soviet Union’s capabilities, whether in military,
political, or economic terms. Nevertheless, it retains many of the USSR’s
nuclear weapons, both strategic and tactical, and both Russian military
doctrine and elite-level Russian politics assign continuing importance to
nuclear weapons far beyond that offered by their American counterparts.
This is an especially significant considering during times of crisis.
Deescalating the conflict in Ukraine and working toward a political
settlement will be extremely difficult. After all, a settlement is only a
settlement if it is acceptable to all sides, and it is not yet clear that Ukrainian,
Russian, American, and European interests intersect sufficiently to allow for
such a solution. Nevertheless, the alternative—continued escalation with no
apparent upward limit—is also very unattractive for everyone, and first and
foremost for Ukraine.
Absent a political solution, the United States should do whatever it takes to
protect vital U.S. national interests in the current dispute with Russia over
Ukraine and to defend U.S. allies. In doing so, however, American officials
should consider carefully the potential costs of a long-term adversarial
relationship with Moscow. Russia’s leaders will make their own decisions, but
they would do their country a service by also evaluating the costs of a longterm tensions.
8
RUSSIA’S ASYMMETRICAL RESPONSE:
GLOBAL AIKIDO
BY FYODOR LUKYANOV
Forecasting global developments is the first and foremost task of
professional policy analysts, whether they work for the government or for
corporations, and for researchers, who attempt to study events from an
academic perspective. But experience shows that such forecasting is not
always precise, in part because those who conduct it are often influenced by
prevailing stereotypes. Thus, a combination of rational evaluation and literary
fantasy sometimes proves to be much more accurate than traditional, matterof-fact analytical work.
The Specter of the Future
Let us imagine a not-so-distant future—the fall of 2017. A major
international conference entitled “One-hundred Years after the October
Revolution: Lessons for the 21st Century” is taking place in Moscow. The
conference’s attendees include Chinese President Xi Jinping, Brazilian
President Dilma Rousseff, Indian Prime Minister Narendra Modi, South
African President Jacob Zuma, Iranian President Hassan Rouhani, and the
leaders of many other Latin American, Asian, and African countries.
Additional guests include prominent European politicians—not only those
professing leftist and social-democratic views but also Eurosceptics—and
representatives of non-governmental organizations, anti-globalization
movements, etc.
Russian President Vladimir Putin delivers a keynote address. Its focus is not
on communist ideology or attempts to revive the Soviet economic and
political model. Instead, its underlying message is that the Russian Revolution
of October 1917 ushered in a new era in the history of mankind. It was a
pivotal point that began a drive for equality and justice, and that rejected the
power of a small group of countries, monarchs, and financial and industrial
conglomerates over most of the world’s citizens. Although actual practice
exposed the faults and blunders made when building “real socialism,” these
mistakes did not undermine the international, historical importance of the
event. In today’s new chapter, mankind should remember the energy for
renewal and the aspirations to build a fairer and more democratic world that
the 1917 Revolution unleashed. Now, at the beginning of the 21st century,
the world is again undertaking this quest, having become tired of an
Lukyanov
international system dominated ideologically, politically, and economically by
one power center that seeks to impose its development model on others,
often by force. Everyone immediately recognizes the identity of this single
power center.
Today, this sounds like fantasy. Modern Russia was born in 1991, through
the rejection of communism. Vladimir Putin is the direct heir to Mikhail
Gorbachev, the politician who drove to dissolution the Soviet system created
by the October Revolution. Russian life and economic practices are
characterized by many of the typical features of early capitalism, and are
much harsher than living and economic conditions in the United States or in
Western Europe. Doing business in Russia – and living there – are
sometimes extremely unfair, partly due to the country’s feudal form of
government and partly due to this government’s inefficiency. Beyond this,
Kremlin ideology is based on conservative, traditional values, at least as they
are understood by the present Russian leadership. Although Russia’s foreign
policy is based in part on opposition to the West, Russia is not engaged in an
ideological confrontation like the one that secured the Soviet Union support
from and robust diplomatic ties with many developing countries.
However bizarre this vision may seem to Western readers, the logic of
politics may push Russia to seek ways to expand its support in the world
should confrontation with the West, and especially with the United States,
deepen. If America and Europe respond to a possible political settlement in
Ukraine by further increasing the pressure on Russia—to add to Ukraine’s
negotiating leverage, or to try to go beyond stabilizing eastern Ukraine to
return Crimea to Kiev’s control—that could still happen. And Moscow has
many options for responding to American pressure, which is likely to grow in
the years ahead almost regardless of immediate outcomes in Ukraine. But the
situation is not symmetrical, and the United States objectively has more ways
to influence Russia than vice versa.
The “war of sanctions lists” that erupts from time to time between Russia
and the United States is a vivid, albeit comical, example that shows the
uselessness of the “eye for an eye” approach. In 2012, after the U.S.
Congress passed the Magnitsky Act, Moscow responded by adopting a
similar law and creating a list of American officials to whom it intended to
deny entry to Russia. But it was hardly a match for Washington’s move. In
fact, it’s difficult to imagine why American Senators or judges would consider
it necessary to go to Russia; their Russian colleagues are far more likely to
travel to the United States. Furthermore, the mutual freeze of assets looks
like a joke. There is no proof that the officials from the so-called “Magnitsky
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Russia’s Asymmetrical Response
list” or other such lists have assets in the U.S., but America’s “violators of the
rights of Russian people” surely do not have any holdings in Russia.
Clearly, however, Moscow will not sit idly and simply register new
restrictions imposed by Washington—Russia’s retaliatory agricultural
sanctions make this clear, as do Prime Minister Dmitry Medvedev’s threats to
shut off access to Russian airspace for Western commercial airlines. Moscow
understands that if relations continue to deteriorate further, the United States
and its allies (many reluctantly and under pressure) may move over to
informal but systemic measures intended to deter Russia and cut it off from
Western financing and technology. In fact, widespread elite opinion in Russia
holds that our relations with the United States have already assumed a state
essentially reminiscent of the Cold War. Most believe this situation will most
likely continue for several more years, and that it is not simply connected
narrowly to the Ukrainian crisis.
Washington regards Moscow as a force that inhibits what the United States
considers to be the proper functioning of the international system. Therefore,
this force must be curbed and prevented from questioning the order of
things. Yet for Russia, the incorporation of Crimea became a red line beyond
which there is no going back without risking political collapse. If the United
States and the West also view Crimea as a red line, and continue heavy
pressure on Russia even after a possible settlement in eastern Ukraine, it may
be difficult to avoid a worsening long-term confrontation.
Given these asymmetrical realities, Kremlin leaders understand that Russia
should avoid getting involved in reciprocal responses modeled on the
methods employed by the Soviet Union, which closely watched the balance
of actions and reactions between both sides.
Symbolically, Russia has always acted quite reciprocally. Suffice it to recall its
response to incidents involving Russian citizens in other countries, such as
when three Russian school kids, the children of Russian diplomats, were
beaten up under unclear circumstances in Poland in 2007. Subsequently,
three Poles were attacked in Moscow. Or recall that when Dutch police used
force against a Russian deputy ambassador during a row over Russia’s
detention of a Greenpeace ship in 2013, his counterpart was roughed up in
Moscow. This list can be continued.
However, Russia does no more than merely demonstrate its commitment to
national prestige. Most understand that Russia lacks sufficient power to
deliver an equivalent, reciprocal response to hostile U.S. moves. This means
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Lukyanov
not only that its responses should be asymmetrical and “creative,” but also
that they should be systemic and strategic. Above all, Russia should use
objective global development trends that can benefit it, especially the rise of
China and other emerging economies and the diffusion of economic power,
while also exploiting U.S. weaknesses unrelated to Russian interests and
activities but tied to America’s position as a global leader.
When experts study Vladimir Putin’s political style, they often recall one of
his sport hobbies: Oriental martial arts, specifically judo. While musing over
Moscow’s responses to U.S. pressure, one is compelled to draw an analogy
from Putin’s pastime;; namely, that one of the key skills in many martial arts
(in judo and even more so in aikido) is the ability to first avoid a heavier
opponent’s overpowering attacks and to then turn the opponent’s weight
advantage against him by using momentum and inertia. These principles are
likely to prevail in a potential Russian-American confrontation.
Will Russia Seek an Eye for an Eye?
But before one begins to study this confrontation from a martial arts
perspective, one should consider several more likely and expectable Russian
measures. They may not necessarily be taken, but the possibility that they will
be cannot be dismissed. They are described quite well in an article written by
Russian international relations expert Alexei Fenenko4 and published by the
online edition of Russia Direct, and we may as well rely in our analysis on his
conclusions.
One way to take revenge upon America, Fenenko argues, would be to create
problems for the Northern Distribution Network, which is critical for
providing logistical support to U.S. troops in Afghanistan. Since the United
States is in the crucial stage of its withdrawal from that country amid a
disastrous situation in Iraq, intentional complication of this process could
create serious problems for Washington.
Denunciation of the agreements signed in 2008 and 2009 with NATO and a
ban on land and air transit through Russia could also be a possibility. This
would make the United States and its allies hurriedly look for alternative
routes in the Caucasus and Kazakhstan, which would be costlier and longer,
while transit through Pakistan would be fraught with serious security risks.
"Don't Tease the Bear: Russia's Retaliatory Sanctions Have Teeth," Alexey Fenenko, Russia
Direct, April 3, 2014, available at http://www.russia-direct.org/content/dont-tease-bearrussias-retaliatory-sanctions-have-teeth
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Russia’s Asymmetrical Response
Experts also mention Russia’s pressure on its Collective Security Treaty
Organization (CSTO) allies to curtail their cooperation with the United States
and NATO on Afghanistan. This is possible in principle, but some of
Moscow’s partners may sabotage this effort to avoid putting all their eggs in
Russia’s basket. Uzbekistan, which has officially quit the CSTO and is not
Russia’s ally, would be least reliable.
Another traditional area where Russia could make a U-turn and thus
influence the United States is arms control and international nuclear security
treaties, especially since practically all of them contain a clause allowing
Russia to withdraw if its national security is endangered. In fact, when New
START was under negotiation, some skeptical voices in Moscow questioned
the need for new agreements with the United States. The treaty’s preamble,
which links defensive and offensive strategic armaments, is interpreted in
Russia as providing an indisputable right to repudiate all agreements if the
United States proceeds with its missile defense plan. Since U.S. missile
defense deployment is underway, it won’t be hard to find such justification in
Russia.
In March of this year, rumors emerged that Russia would renege on the
agreement giving American inspectors access to its nuclear arsenals. This
hasn’t happened yet, but limiting transparency measures is a natural
possibility as bilateral relations are increasingly characterized by militaristic
rhetoric.
Some international treaties, particularly those signed by Presidents Mikhail
Gorbachev and Boris Yeltsin, were never popular in the Russian strategic
community. The wisdom of continuing to honor the 1987 INF Treaty and
the Comprehensive Test Ban Treaty (CTBT), to which Russia acceded in
1996, are most often questioned. In a confrontation with the United States,
Moscow could abandon them, especially since the CTBT has not been
ratified by the United States or China and the INF Treaty is already
producing fierce disagreements between Russia and America.
Following through on Vladimir Putin’s recent indication that Russia could
terminate the INF Treaty would quickly affect the course of events, most
likely reviving Europe’s worries of the 1980s, when the Old World feared
becoming a battlefield between the United States and the Soviet Union. At
the time, Europe’s fears were two-fold: On one hand, Europeans urged
America to strengthen Europe’s nuclear forces to deter the Soviets;; On the
other hand, there were strong anti-war protest movements in Europe
directed against America, which left-wing activists and sympathetic leftist
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politicians said was ready to sacrifice Europe to further its own superpower
ambitions. Now, of course, the situation is different: Russia is not the Soviet
Union, nor can it mobilize the broad European public for its benefit. At the
same time, however, America’s popularity in Europe has plunged, especially
after a series of U.S. scandals and failures in the world, ranging from
mistreatment of prisoners in Iraq to electronic surveillance and spying.
Another possibility that would annoy America would be Russia’s return to
Cuba and restoration of the Russian radar station at Lourdes, which was
closed by Vladimir Putin in 2001. This option was discussed in 2007, when
Russia and the United States were at loggerheads over missile defense, but
things did not go any further then. Today, this looks more probable, as
Russia is generally bent on restoring relations with former Soviet allies. The
closure of the radar station angered Cuba’s then-leader, Fidel Castro, and its
present leadership will most likely welcome its reopening, especially since it
will give the country an additional source of much needed revenue. After
Putin’s visit to Cuba in July 2014, the Russian president publicly denounced
rumors of a deal to reactivate the station and said that no agreement has been
reached. Of course, this doesn’t exclude the possibility of reaching one later.
Russia can also make things harder for the United States in the Middle East.
Moscow’s firm and unyielding position on Syria in 2011-2014 has partly
restored the Kremlin’s authority in the region, which was lost after the
disintegration of the Soviet Union and Russia’s disinterest in the region
during the 1990s. Many countries, including those historically relying on the
United States but deeply disappointed by its ill-considered and inconsistent
policies in the region, expect Russia to assume a more active position.
With Iraq falling apart and the Syrian-Iraqi region turning into a battlefield
for religious war, Russia can step up its support for traditional partners such
as Bashar al-Assad, Iran, and pro-Iranian Shiites in Iraq. Lifting sanctions on
Tehran if its nuclear talks end successfully would allow Moscow to resume
full-scale arms sales, energy trade, and peaceful nuclear cooperation with
Iran.
However, frankly speaking, it’s hard to imagine what exciting and
provocative steps Moscow could take now to create more problems for the
United States in the Middle East, as the situation there is already highly
chaotic – even by Middle Eastern standards.
14
Russia’s Asymmetrical Response
Fenenko comes to the conclusion in his article that unlike the Soviet Union,
Russia can, as a last resort, take drastic measures to destabilize the global
situation. He thinks that, in the Soviet Union,
the prevailing view was that global stability in itself is valuable,
even at the cost of serious concessions. Now the situation has
changed. Russia’s changed circumstances since the Soviet era
is impelling Moscow to look at tougher retaliatory measures.
The Soviet leadership felt more secure in its superpower status
and could afford not to respond to provocation. The Russian
leadership has no such safety margin.
However, it’s hard to agree with this conclusion. In fact, the Soviet Union
did feel quite secure and never doubted its ability to control processes, since
dramatic and dangerous confrontation always occurred within certain limits,
written or unwritten. This enabled the Kremlin (and the White House) to do
many things. For example, Moscow could afford to support and even foment
regional conflicts, finance the “right” kind of extremist and terrorist
organizations, test its strength in different parts of the world, and raise the
degree of confrontation while firmly believing that de-escalation was quite
possible, if necessary.
Today, the Russian leadership thinks differently. Vladimir Putin has spoken
often about the dangers of a chaotic, unpredictable, and uncontrollable
world, a world of unforeseen consequences. Uncertainty about the results is
the main deterrent to geopolitical troublemaking. The Russian leadership
believes that the United States pursues an adventurist and irresponsible
policy by getting engaged in different foreign campaigns and endeavors with
unfathomable results. The growing uncontrollability of the international
environment is seriously worrying the Kremlin, which is well aware of
Russia’s vulnerabilities to instability.
Thus the desire to improve Russia’s position by fishing in “murky waters” is
not currently the underlying motive of the Russian leadership. Still, Russia
views what is required for achieving stability differently than does the United
States in some respects—as is obvious in Syria—and steps by Moscow to
promote stability could instead look—in American eyes—like attempts to
promote the opposite. Setting this aside, however, Russia’s actions are as a
rule reactive and defensive in nature, even if they look offensive and
aggressive. The incorporation of Crimea is not an exception to this, as it was
driven primarily by the fear of having on its border either a completely
uncontrolled and explosive state or an officially-avowed anti-Russian one.
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Lukyanov
(Actually, both of these outcomes are still possible and an anti-Russian
Ukraine seems increasingly likely.) Russia’s involvement, albeit quite
reluctant, in the civil war in eastern Ukraine only bears out Moscow’s
concerns that nothing can be predicted.
Besides, we should remember one of Putin’s personal features: Being
generally quite suspicious of the West in general and having no positive
feelings about the United States in particular, he is very fastidious about the
promises he makes. This explains why Russia has so far not even considered
terminating its cooperation with Washington and NATO on Afghanistan,
even though this would be a logical step now that relations have chilled. It is
notable that even the most consistent opponents of the United States in the
State Duma mentioned this possibility for the first time only on July 17 of
this year, after the Obama administration imposed fairly tough sanctions on
selected Russian banks and energy companies.
Taking all of this into account, it would be hard to imagine Russia
deliberately destabilizing the world order and becoming a global spoiler
preoccupied with damaging the United States. However, Moscow can pursue
a different strategy, one not destructive (destroying the existing world order)
but instead constructive (building a new world order). The world may already
be ripe for this, and Russia has some tools for doing this that it has not used
yet. This brings us back to “martial arts” and Russia’s search for asymmetrical
policy responses.
Russia’s Asymmetrical Option: Global Aikido
Many believe that the new Russian-American and Russian-Western
antagonisms differ from Cold War-era tensions because of the absence of an
ideological basis for the conflict. According to this view, the new
confrontation is a classical geopolitical rivalry: America seeks to sideline
Russia, while Russia naturally resists, biting back wherever possible. Hence
the expectation is that Moscow will start “taking revenge” on the U.S. in the
Middle East, East Asia, and elsewhere.
However, as was mentioned above, Russia would pay a significant price in a
struggle like this. Yet there are two other options that are complementary,
rather than mutually exclusive. One involves avoidance of any further, and
termination of all existing, assistance to the United States without direct
conflict. The other option is ideologizing the confrontation under the banner
of building a new and more just world order in place of the U.S.-centric one
that is now under increasing strain.
16
Russia’s Asymmetrical Response
Let’s first discuss avoidance of assistance. It is widely believed in Russia that
the United States, which has voluntarily assumed the role of world leader, is
overstrained and unable to cope with this task. In practical diplomatic terms,
this means that without assistance from its partners, Washington is unable to
control many difficult processes in the world simultaneously, especially as
their number is growing. In the most important conflict areas—Iran, Syria,
North Korea, Afghanistan, and now Ukraine—the U.S. needs the
participation of other countries. Even Russia is an integral part of solutions
to some of these issues and others, as Americans themselves admit. Or
rather, without Russia, there may be no solutions that do not require
excessive expenditure.
At the same time, against the background of unending public political
discussions, Russian and American diplomats cooperate in a businesslike
manner on a wide range of issues, including Iran’s nuclear program, Syria’s
chemical disarmament, coordination of an international response to North
Korea’s behavior, the settlement of endless contradictions within the WTO
framework, and responses to local conflicts in Africa. In many cases—such
as the Iran, Syria and North Korea ones—Russia’s connections and
capabilities significantly facilitate communication and enable progress or, at
least, prevent regression. Numerous conflicts in Asia, which are bound to
escalate, are an obvious area where Russian-American interaction might be
useful. In some cases, Russia is viewed as a more neutral participant,
considered acceptable to all sides, than is the U.S. or Europe (the post-Soviet
space is an obvious exception to this, but here one can only note the evercontinuing “agreement to disagree”).
According to many Russian diplomats, if Russia simply ceases to participate
in all these processes and ends its cooperation, the U.S. will soon be faced
with growing problems. In this case, America’s military-political and
economic weight will play against it, since expectations are high, but most
complex conflicts require political solutions based on a multilevel and subtle
approach. Russia’s disengagement would make this more difficult.
Last fall’s chemical weapons agreement on Syria is an elegant example of this.
Without the Russian President’s contribution, the U.S. might have been
involved in yet another military campaign in the Middle East, with
unpredictable results. The alternative to either reaching a deal or going to war
was that America would have backed away from its own “red line.” Judging
by what is occurring in Iraq today, it is easy to guess who would have
benefited from U.S. strikes against Bashar al-Assad’s troops: the Islamic
State, which is now occupying much of Iraq, and which was also a significant
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component of the Syrian opposition. Obviously, Vladimir Putin pursued his
own and Russia’s interests, and in doing so helped America to avoid taking
unnecessary and dangerous political-military actions.
Generally, the scale of U.S. involvement in world affairs and the expectations
associated with it are so great that U.S. leadership has turned into a heavy
yoke that cannot be cast off, but is also increasingly hard to carry. Several
years ago, when Barack Obama was preparing to become president,5 the idea
of global burden-sharing—that is, delegating to key regional states the
powers of supporting U.S. partners—became extremely popular. This was
seen as a substitute for the unilateral leadership of the preceding Bush
administration. Now we can say that the result is the opposite: the United
States once again has to rely mainly on itself, while potential regional
supporters behave more and more independently. But while unilateral
leadership was previously a conscious choice, now it is the only possible
option.
Passive behavior—meaning not only that Russia will not use its capabilities
against the United States, but also that it will not use them at all—would be
quite in line with the philosophy of many martial arts, including dodging
blows and benefiting from the rival’s mistakes.6 Russia would not apply this
tactic in the post-Soviet space, where it plays sports like Thai boxing or even
ultimate fighting, but in the rest of the world, where Russia has few if any
vital interests.
The second option is to take advantage of America’s setbacks in global
governance and of the shortcomings in the global economic architecture.
The Ukraine crisis has an important aspect that not everyone has been able
to perceive: in a bid to punish Russia, the United States has used its power as
a regulator of the world economic system as a weapon. By threatening to
withhold the “keys” to globalization, it prompted its opponents to reclassify
anti-Americanism into a conceptually much broader phenomenon: antiglobalism or, rather, alter-globalism; that is, moving beyond the current
design of the global economy in favor of some other system.
The White House’s decision to impose sanctions against the Russian officials
it sees as being closest to Vladimir Putin led to sanctions being imposed
against four Russian commercial banks. The payment systems Visa and
See, for example, Charles Kupchan and Adam Mount, “The Autonomy Rule,” Democracy
Journal No. 12 (Spring 2009), available at http://www.democracyjournal.org/12/6680.php.
6 See Ivan Safranchuk, “Traveling in Different Boats,” Russia in Global Affairs No. 4 (October
– December 2008), available at http://eng.globalaffairs.ru/number/n_11888.
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Russia’s Asymmetrical Response
MasterCard complied with the sanctions and blocked credit card services to
these banks, which caused problems for the banks and fueled long-discussed
plans to establish a national payment system in Russia. Also, Russia’s
Ministry of Finance tightened rules for the two credit card companies,
demanding that they make a huge security deposit as protection against force
majeure. The possible outcome of the conflict is unclear; the credit card
companies are threatening to leave the Russian market, but in the context of
this discussion, this is not the most important consideration.
Denying banks access to international transactions is a powerful lever, but
demonstrating who the master in our shared global home is has a downside.
U.S. world leadership is based on the conceptual premise that it not only
ensures prosperity for all but that it is also just—it is not someone’s
subjective will that decides everything; instead, the laws of the free market are
supposedly decisive. Excluding Russian banks from payment systems,
limiting the use of software produced by major IT companies, or shutting
Russia out of the SWIFT system of international banking payments, a
measure that was earlier taken against Iran, demonstrate an indisputable fact:
one power has dominant influence and uses it for political purposes.
As long as such measures were used against countries like Iran, not to
mention odious governments like Gadhafi’s in Libya, they did not have such
a strong effect. But when such pressure is put on one of the most important
and influential countries in the world, it means that no one can feel safe. It
also means that, in a heated conflict with the United States, global rules can
be changed and directed to work against any target Washington desires.
This stimulates new trends—the fragmentation of the global economy and
society, the creation of zones of preferential trade rules and national or
regional payment systems, and hedging against non-economic methods of
global competition. American efforts to establish the Transatlantic Trade and
Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP)
trade zones actually undermine the WTO’s principle of universal rules for
world trade. The rapidly strengthening partnership between Russia and China
suggests that in response to U.S.-centric economic zones, they may try to
compete with their own major projects—Russia’s Eurasian Economic Union
and China’s Silk Road Economic Belt. Coordinating Russia’s and China’s
interests in order to facilitate cooperation between these two entities will be
difficult, yet hardly more so than is reaching an agreement between the U.S.
and the EU on new trade rules.
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Lukyanov
Russian Prime Minister Dmitry Medvedev and Minister of Economic
Development Alexei Ulyukayev have both already promised to challenge U.S.
sanctions in the WTO as unfair competition. If filed, this suit could take
several years to be investigated, but it will support the key goal of
demonstrating how the U.S. undermines its own principles for political
purposes.
After the end of the Cold War, the world saw little real institutional redesign.
Some global governance institutions survived from the previous era, and
some others, which formerly provided economic and financial services to the
West, extended their operation to the rest of the world. At the rhetorical
level, they came to reflect universal interests, but in practice there were
continuous charges that these institutions remained instruments of Western
control and dominance. The campaign of sanctions against Russia provides
additional support for this view: for example, the European Bank for
Reconstruction and Development, which in theory is an institution operating
outside of politics, is being used by major shareholders to apply pressure on
Russia.
I repeat, such methods of pressure were used in the past as well. But they
never were used against such a powerful state. The key issues are not military
power nor energy levers, but are instead ideology and the ability to produce a
universal narrative. Vladimir Putin has already begun to focus on this, as was
clear in his recent remarks at the 2014 BRICS Summit in Brazil.
The world as a whole is growing increasingly tired of the lack of alternatives
to the U.S.-centric order. Not everyone likes the Western model of social
order and political behavior, yet no one offers any viable alternative.
Meanwhile, the complete domination by the United States in world affairs
causes growing resentment and rejection of America, even among U.S. allies.
Previous attempts to offer alternatives failed either because the countries that
made them did not have enough international clout, or because of their
scandalous leaders, like the late Hugo Chavez. Unlike these countries, Russia
still has much of the strategic mindset of the USSR, which aspired to be a
systemic alternative to the West. This factor manifested itself last year in the
Middle East, where many expected that Russia would convert its successful
Syria policy into the role that the Soviet Union had played in the region—
namely, as a second patron to whom one could defect from the United
States. There were, and could be, no such plans last year. Now the situation is
changing—and Russia may be at least ready to assume this role.
20
Russia’s Asymmetrical Response
Acting as a serious troublemaker (Moscow did cross a red line in Crimea),
Russia cannot continue to operate within the same global paradigm, wherein
the West has an indisputable advantage. To strengthen its position, Moscow
will have to oppose America ideologically and must formulate a different
vision of the world order. Emphasizing conservatism will not be enough—
this is good only for discussions within Western culture. A united “right-left”
opposition is needed, in which the conservative defense of national identity
would be combined with the Third World’s anti-globalist rhetoric about the
injustice of the current system.
No other country but Russia can bring about such an opposition. China
values the opportunities provided by globalization, although it is not happy
about everything. In addition, it is not good at advancing global-scale ideas—
this has long been America’s forte. By virtue of its cultural identity, China’s
ideological influence can only spread within the Chinese cultural area. On the
other hand, Beijing can tacitly support such an initiative; after all, it hardly
misses any opportunity to remind the West that the time of its hegemony has
passed. Also, China understands that Russia’s conflict with the West has only
postponed a global rivalry between China and the United States, which may
unfold and intensify in a few years, probably by 2020. The dispute between
Russia and the West has hardly erased Sino-U.S. tensions. That is why
Russian-Chinese cooperation may become one of Russia’s most consistent
responses to increasing pressure from the United States.
At the global level, new Russian-Chinese cooperation is likely to spur
systemic efforts by the two countries—albeit very cautious at first—to erode
the global domination of institutions and practices of the Washington
Consensus. A gradual weakening of the U.S. dollar in trade settlements
among members of the SCO and the BRICS and the development and
mutual recognition of national payment systems by them, the establishment
by the BRICS of their own development bank,7 and the creation by Russia
and China of an international rating agency to compete with the Big Three—
Moody’s, Fitch, and Standard & Poor’s8—could be the first signs of a
restructuring of the global economy.
Leonid Grigoriev and Alexandra Morozkina, "Different Economies, Similar Problems,"
Russia in Global Affairs, June 30, 2013, available at
http://eng.globalaffairs.ru/number/Different-Economies-Similar-Problems-16051
8 "Siluanov: Russia and China Will Establish a Joint Rating Agency," Vedomosti, June 3, 2014,
available at http://www.vedomosti.ru/finance/news/27301271/siluanov-rossiya-i-kitajsozdadut-sovmestnoe-rejtingovoe (In Russian).
7
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Lukyanov
In early June, Russian Minister of Finance Anton Siluanov said at the fifth
Financial Dialogue between Russia and China in Beijing that the two
countries had agreed to establish a joint international rating agency. Earlier,
the Chinese Dagong rating agency had announced plans to create a joint
venture with American and Russian partners to organize an independent
global rating group. The structure is to be called Universal Credit Rating Group.
The partners will be Egan Jones Ratings of the United States and RusRating
of Russia. The Russian parliament adopted a law on the establishment of a
national payment system almost immediately after the banks Rossiya, SMP,
and others were hit with U.S. sanctions. Potential international partners
include China’s UnionPay, Japan’s JCB, as well as VISA and MasterCard.
Brazil and Argentina may also participate in the project.
Russia’s post-Crimea turn towards China may have another unexpected
effect with serious consequences: the “nationalization” of the Internet. In
addition to the two countries’ close positions on the role of the Internet
Corporation for Assigned Names and Numbers (ICANN) and on Internet
governance (the need to delegate the governance functions from a private
U.S. company to international institutions), the Russian government’s
determination to establish a Russian analog of the Great Firewall of China
can be a kind of revenge of the Westphalian order on the World Wide Web.
As noted by Russian researcher Dmitry Yefremenko, “the famous principle
cuius regio eius religio (‘Whose realm, his religion’) in the middle of the 2010s
can be reformulated as ‘Whose server, his Internet’.”
The most likely outcome of this conflict will be the acceleration of a process
that has long been spoken of in Russia: a departure from the U.S. dollar as
the dominant currency in international trade transactions. Russian
presidential advisor Sergei Glazyev has long insisted on such measures and
has even proposed not using the dollar at all. Now this probability is
discussed by Russian businesspeople.9 As a model, they look to IndianIranian transactions, whereby India pays for Iranian oil in rupees. Iran
maintains a rupee account with UCO Bank in Kolkata, from where Indian
exporters are paid against their shipments of various goods. Russia also had
experience with such interaction in Soviet times. The Council for Mutual
Economic Assistance, the economic wing of the Warsaw Pact, practiced
trade in non-convertible currencies on a mutual offset basis. Another model,
clearing, was used between the Soviet Union and Finland, for example. The
"Russian Companies Prepare to Pay for Trade in Renminbi," Jack Farchy and Kathrin
Hille, Financial Times, June 8, 2014, available at http://www.ft.com/intl/cms/s/0/9f686816ed51-11e3-abf3-00144feabdc0.html#axzz3A79iXllB
9
22
Russia’s Asymmetrical Response
May 2014 Russia-China gas deal, which contemplates $400 billion in gas
supplies over the next 30 years, allows for some renminbi–ruble payments.
Russian-Chinese rapprochement may also have a purely political regional
effect—a marked strengthening of the Shanghai Cooperation Organization
(SCO). The SCO is already the most representative and influential
organization in Central Eurasia. Against a backdrop of ongoing geopolitical
changes, it can increase its symbolic capital even further. Until recently,
China had continuously delayed admitting India and Pakistan to the SCO.
But now, according to Russian diplomats, Beijing is ready to take a more
flexible approach because of its growing rivalry with the United States in East
Asia. An enlarged SCO (including India, Pakistan, and also possibly
Mongolia) could become a serious and highly diversified organization with
unique capabilities in a critically important region. If the current negotiations
on the Iranian nuclear program succeed and the UN Security Council lifts its
sanctions against Tehran, Iran could become a full member as well (it now
has observer status). The SCO Charter prohibits countries under
international sanctions from enjoying full membership.
Moscow will not be able to retain a monopoly on rule-setting in such a large
organization involving such powerful countries. Actually, Russia does not
have a monopoly now—China outweighs Russia economically, and if the
SCO’s present composition does not change, there will be little room for
balancing. But if the SCO admits India, Pakistan, and Iran, the diplomatic
process within the organization will become more complicated but will also
allow for more potential “coalitions.” In addition, the overall clout of the
organization in the world will multiply. Back in 2005, the SCO called on the
U.S. to clearly define a timeline for its presence in Central Asia. Now, the
organization’s aversion to the U.S. presence in the region has only increased.
Of course, Moscow will also take into account the growing tension between
Washington and the latter’s European allies. Many of these allies have
resisted strengthening of sanctions against Russia, because those measures
will badly affect EU economies. Sanctions have already generated visible rift
inside the EU, where businesspeople and even some in the political
establishment complain that Washington has totally disregarded European
interests while struggling to punish Russia, rather than attempting to resolve
the crisis in Ukraine. This comes on top of fury in Germany about
comprehensive spying by the U.S. that might have a long-term impact on
transatlantic relations. Russia will not be afraid to use these sentiments to
advance its interests.
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*
*
*
Over the 15 years of Vladimir Putin's rule, we have learned his political style
well enough. Firstly, he never responds immediately and usually takes a break
to consider matters; he has strategic patience. Secondly, he does not like to
break promises, even if they were given to his opponents. Thirdly, he has a
comprehensive view of the world, and he understands the world system and
its various interrelationships. Combined with a tactical flair and fast
adaptation to changes, this helps him to do without an action strategy, which
hardly exists in practice.
“As long as Russia is not subject to systemic sanctions, which could bring an
artificial limit to our economy's access to dollars...then I don't think Russia
will take any steps in order to bring about artificial de-dollarization," the
Financial Times quoted Andrei Belousov, economic adviser to Mr. Putin, as
saying.10 Yet one cannot rule out the possibility for exacerbation of the crisis
in relations with the United States. If a real confrontation begins, Russia will
seek to use objective weaknesses of the world leader. If Moscow sides with
advocates of a revision of the current international system, which it has never
supported before, this may significantly change the global balance of power.
Russia may pool its capabilities with those of China—not in the military
sphere, as only fringe Russian politicians propose, but in their approaches to
global governance. As masters of judo teach, it is better to not rely on one’s
own strength but to instead use your opponent’s strength against him.
Formulating an alternative approach to global governance when
disappointment over the present leader’s approaches is increasing is
consistent with this teaching. Russia can become a catalyst of this process,
which has already begun. This does not guarantee an immediate effect, but it
could be quite successful over time.
"Russian Companies Prepare to Pay for Trade in Renminbi," Farchy and Hille, Financial
Times, Op. Cit.
10
24
THE DANGERS OF A NEW CONTAINMENT
POLICY FOR RUSSIA
BY THOMAS GRAHAM
The Ukraine crisis has ushered in a new era in U.S.-Russian relations. To be
sure, relations had been deteriorating for some time—at least since fall 2011,
when Putin announced his decision to return to the Kremlin. Stark
differences between both countries over Syria and broader developments in
the Arab world, Moscow's offer of asylum to NSA-leaker Edward Snowden,
and Putin’s vehement accusations of U.S. interference in Russia's domestic
affairs—thereby justifying a crackdown on internal dissent—have all stressed
U.S.-Russian relations to the breaking point. The glimmer of hope offered by
the agreement to work together to eliminate Syria's chemical weapons was
quickly extinguished last fall by fundamental differences over the situation in
the Ukraine.
But it was Moscow's reaction to the ouster of President Yanukovych in
Ukraine—its annexation of Crimea and the destabilization of southeastern
Ukraine, done with a combination of audacity and skill—that finally jolted
the American political establishment into viewing Russia as a significant
threat. That Russia was prepared to flout the rules of Europe's post-Cold
War order to assert its interests was not particularly surprising. After all, it
had already done that in the Georgian War in 2008. But no one had
anticipated that Russia would act in Crimea with such exquisite skill and leave
the United States appearing flat-footed, lacking an adequate response. That
set Ukraine apart from Georgia.
Obama's reset is now dead. Previous failed resets were followed in short
order by new attempts. Indeed, U.S.-Russian relations since the end of the
Cold War have been marked by a recurring cycle of great expectations
followed by deep disappointments. But this time is different. Today's
estrangement runs deeper than it has during any time since the Gorbachev
years. No influential forces in either Washington or Moscow are calling for
improved relations; rather, political leaders and the media in both countries
are actively vilifying the other side. Most bilateral contacts have been totally
severed. Looking forward, both sides increasingly see each other as long-term
adversaries. Unlike in the past, no new reset is just over the horizon simply
awaiting a new American president.
Graham
In the absent of significant hope for constructive relations, the American
political establishment has reached back to the recent past, to the Cold War
era, for guidance. The talk is of an updated containment policy.11 At the
beginning of the crisis in early March, President Obama warned the Russians
that if they did not move to deescalate the situation in Ukraine, the United
States was "examining a whole series of steps—economic, diplomatic—that
will isolate Russia and will have a negative impact on Russia’s economy and
its status in the world."12 As the crisis worsened, the administration began to
make good on that threat by sharply reducing bilateral contacts with Russia,
levying targeted sanctions against individuals and entities considered either
responsible for Russia's actions in Ukraine or to be financially close to Putin,
and trying to rally European allies behind its policy. At the end of May,
Obama claimed success.
Our ability to shape world opinion helped isolate Russia right away.
Because of American leadership, the world immediately condemned
Russian actions; Europe and the G7 joined us to impose sanctions;
NATO reinforced our commitment to Eastern European allies; the
IMF is helping to stabilize Ukraine’s economy; OSCE monitors
brought the eyes of the world to unstable parts of Ukraine.13
With those and similar remarks, Obama may not have explicitly adopted a
policy of containment, but the logic of his administration's actions points in
that direction. The administration continues to threaten Russia with further
sanctions should Moscow not act to deescalate the crisis, but it provides no
clear indication of what Russia must do for the sanctions to be lifted. It
speaks as if it intends to treat Russia as a long-term adversary (or for at least
as long as Putin remains in power), while limiting cooperation—as in the
Cold War—to those areas it judges critical to American security and which
necessitate working with Russia (e.g., implementation of the new START
11
See "Summary of North American Chapter" in Paula Dobriansky, Andrzej Olechowski,
Yukio Satoh, and Igor Yurgens, Engaging Russia: A Return to Containment?, The Trilateral
Commission 2013/2014 Task Force Report, May 15, 2014, pp. 12-20, which leans heavily
towards containment as the appropriate U.S. Russia policy.
12
See "Remarks by President Obama and Prime Minister Netanyahu before Bilateral
Meeting," March 3, 2014, available at http://m.whitehouse.gov/the-pressoffice/2014/03/03/remarks-president-obama-and-prime-minister-netanyahu-bilateralmeeting.
13
See Remarks of President Barack Obama, Graduation Ceremony, West Point, New York,
May 28, 2014, available at http://www.whitehouse.gov/the-pressoffice/2014/05/28/remarks-president-barack-obama-graduation-ceremony-west-point-newyork.
26
The Dangers of a New Containment Policy for Russia
treaty and retaining access to the International Space Station). Moreover, its
tendency to look at Russia and the Ukraine crisis solely through the prism of
security in Europe—the Cold War's central battlefield—lends its Russia
policy a Cold-War aura, even if Obama insists we are not witnessing a return
to that era.14
There are good reasons for skepticism that the United States can contain
Russia as effectively today as it once did the Soviet Union. Today's world is
radically different from the Cold War's bipolar world of existential struggle
between two diametrically opposed views of man, society, and the state,
between two world systems with few points of contact. Now, in contrast, we
live in an increasingly multipolar, globalized world in which traditional
geopolitical competition is overlaid by a set of global challenges, the
management of which requires collective action. Russia, among the world's
largest economies, is moreover increasingly integrated into the global
economy, having abandoned the Soviet quest for autarky, which is now
considered unworkable. Under those circumstances, the developed world will
not defer to the United States, as it generally did during the Cold War, and
the major emerging powers are unlikely to give the U.S. much heed.
Notwithstanding closer U.S.-European Union alignment and greater
European unity after Ukraine’s rebel forces apparently accidentally shot
down Malaysian Airlines Flight 17, the travails in forging transatlantic unity
on tough sanctions against Russia and the refusal of China, India, and Brazil
to condemn Russia's annexation of Crimea foretell the challenges ahead. If
the current cease-fire in Ukraine holds and the parties begin to seek a
political settlement, these challenges will grow.
*
*
*
The challenges, however, are not likely to dissuade the American political
establishment from considering—nor the Administration from
implementing—ever-harsher measures to tame a resurgent Russia, even if
actual containment is infeasible. The prevailing view is that the United States,
as a matter of principle and national interest, must push back vigorously
against a Russia that challenges the principles of the American-led world
order and that more often than not seeks to constrain American action on a
range of functional and geopolitical matters.
14
Ibid.
27
Graham
The world-order challenge is hardly new. Even under Yeltsin, the Kremlin
never truly accepted American leadership. Initially it aspired to be an equal
with the United States in managing the global agenda, however impossible an
ambition that might have been given the gaping asymmetry in power and
fortune between the two countries then. Later, it actively promoted a
multipolar world, working with China and India, in particular, to create a
counterbalance to the West. All along it vehemently opposed NATO
expansion. Moreover, while it might have declared support for democratic
and free-market principles, it upheld a traditional view of national
sovereignty and rejected humanitarian intervention; witness the stiff
opposition to NATO's military operation against Serbia for its actions in
Kosovo in 1999. The United States evinced little concern, however, for
Yeltsin's Russia was mired in a profound socioeconomic and political crisis
and lacked the capability for effective resistance.
That changed under Putin. The remarkable and largely unanticipated
recovery that took place on his watch gave Russia the resources and
confidence to pursue more assertive policies against what it saw as the
United States’ hegemonic designs. Throughout his first two presidential
terms, Putin sought to constrain the United States in three ways: He
championed the UN Security Council as the sole authority for legitimating
the use of force (other than in self-defense) and sought to bring key issues to
the Council, where Russia could use its veto to thwart or shape American
initiatives; He built coalitions designed to limit America's room for
maneuver, taking the lead in creating the BRICS in order to lessen Western
domination of global economic management and joining China in the
Shanghai Cooperation Organization to constrain the United States in Central
Asia; And he sought to build a partnership with the United States based on
binding agreements that would limit American options and make it more
predictable in Moscow's eyes. Russia did not stray from that three-pronged
approach during the Medvedev interlude, even if Medvedev himself
presented a more pleasant face to Washington.
With his return to the Kremlin in May 2012, Putin took his opposition to the
U.S.-led world order a step further, adding a moral dimension. He began to
attack the West's growing decadence in rejecting "the Christian values that
formed the foundations of Western civilization," including traditional sexual
norms. While some Russian figures have advanced Eurasian values against
European ones, Putin, more exactly speaking, has defended traditional
European values against the West's post-modern interpretation of them, with
an eye to bolstering his support among the deeply conservative Russian
28
The Dangers of a New Containment Policy for Russia
population, more traditional societies abroad, and even conservative
segments of the West.15
The final, and most recent, challenge comes with Russia's seizure of Crimea,
a clear violation of a fundamental principle of world order. Putin raised
further alarms when he declared that Russia would "always defend the
interests of [ethnic Russians and Russian-speakers in Ukraine] by political,
diplomatic, and legal means."16 Although he limited the scope of his remarks
to Ukraine, they were understandably read by Russia's immediate neighbors,
all of which have sizable populations of ethnic Russians and Russianspeakers, as an implicit threat. Moreover, a generalized right to defend the
interests of one's ethnic and cultural community would threaten havoc in a
world, including Europe, where most states are in fact multiethnic.
This broad-based challenge to the U.S.-led global order alone would have
provided sufficient reason for the American political establishment to deal
more severely with Russia. But the Ukraine crisis has also cast a harsher light
on U.S.-Russian interaction on other functional and geopolitical issues. On
none of these issues, save those concerning the former Soviet space, are
American and Russian positions diametrically or irreconcilably opposed.
Instead, different understandings of the nature of international problems,
goals, and tactics complicate U.S.-Russian diplomacy and compel the United
States to pursue less robust policies than those it would otherwise prefer.
Iran offers an apt illustration of this. For the past decade, Russia has
prevented the UN Security Council from endorsing the crippling sanctions
the United States has advocated, because Russia has no interest in excessively
harming a country that has largely respected its interests; because it sees
preventing Iran from obtaining nuclear weapons as less of a priority than
does the U.S.; and because it rejects Washington’s pursuit of regime change
in Tehran. Analogous divergences in outlook and approach obtain on most
of the high-profile international issues of the past ten to fifteen years,
including on Syria and Iraq in the broader Middle East, and on North Korea
in East Asia, as well as on non-proliferation and counterterrorism. Whatever
cooperation there has been has occurred within a competitive framework.
15
See Putin's remarks at the Valdai International Discussion Club, September 19, 2013, from
which the quoted material is drawn, available at http://news.kremlin.ru/transcripts/19243.
16
See "Obrashcheniye Prezidenta Rossiyskoy Federatsii," March 18, 2014, available at
http://news.kremlin.ru/transcripts/20603.
29
Graham
This competition is most intense in the former Soviet space, which Russia
sees as a zone of "privileged interest," as a critical buffer against neighboring
great powers. Since the breakup of the Soviet Union, Russia has created
various institutions designed to maintain its influence there, beginning with
the Commonwealth of Independent States. The most ambitious to date is
Putin's Eurasian Union, which he hopes will eventually include all the former
Soviet states with the possible exception of the Baltic States. The United
States has, however, made a special point of refusing to recognize any
country's claimed sphere of interest. Yet it has pursued policies in the former
Soviet space aimed in practice, if not in word, at limiting the Russian
presence there, which is why Washington has refused to recognize or deal
with any of the regional institutions Russia has sponsored, with the exception
of the Shanghai Cooperation Organization. That is the unspoken goal behind
NATO expansion. Ukraine today is only the most visible—and dangerous—
example of a more general U.S.-Russian rivalry.
*
*
*
It is against this comprehensive and enduring threat (in Washington’s view)
that the U.S. will now elaborate a new Russia policy. The initial decisions will
of course be taken against the background of the Ukraine crisis. But even if
Russia works diligently for a political resolution that respects Ukraine's
sovereignty and territorial integrity, Washington will continue to seek ways to
punish, constrain, and weaken Russia, now seen as an adversary.
Should the U.S.-Russia relationship further deteriorate, the United States will
likely pursue the following goals:
• Short-term: Exacting a cost from Russia for its actions in Ukraine, deterring
further aggressive Russian actions, and persuading Moscow to support a
political resolution acceptable to what the United States considers to be the
legitimate Ukrainian government under President Poroshenko
• Medium-term: Degrading Russian capabilities and reducing its options for
expanding its sway in the former Soviet space and projecting its influence
abroad, particularly into Europe
• Long-term: Exacerbating internal tensions in Russia in the hope that this will
lead to the mellowing of the current regime, or its overthrow
30
The Dangers of a New Containment Policy for Russia
The United States, alone and together with its various allies and partners, has
already taken a number of steps in pursuit of these goals. They include
imposing targeted sanctions against a limited number of Russian officials,
and on other individuals and commercial entities considered financially close
to Putin, as well as on a number of Russian defense firms; placing restrictions
on new financing to Russia’s largest banks and energy companies; instituting
stricter limits on the export of certain technologies to Russia; putting
limitations on Russian access to certain U.S. facilities involved in developing
cutting-edge technologies;17 taking steps to reassure vulnerable NATO
member countries of the alliance's commitment to Article 5 collective
defense guarantees;18 and exclusion of Russian from certain international
organizations and mechanisms, such as the G8, now for all practical
purposes the G7. Meanwhile, the United States and its allies are threatening
further sanctions.
So far, these steps have not noticeably affected Russia's policy toward
Ukraine, including its support for separatist forces in eastern Ukraine and its
integration of Crimea into the Russian political and socioeconomic system;
on the contrary, Moscow has escalated its involvement in Ukraine as the
United States and the EU have increased pressure on Russia. And they are
unlikely to have much impact in the short run, because Moscow considers
Ukraine to be a vital interest and is prepared to bear a heavy price to ensure
that it does not move into the Western orbit. The more dangerous prospect
for Moscow, however, is the longer-term implications for Russia's economic
well-being of the American policies already in place and the still harsher steps
the United States might take to harm Russia and its position in the world.
Another paper will focus on the economic steps the United States can take
and on the challenges taking these steps will present to Russia. The focus
here will be on security, energy, and related policy.
*
*
*
In the security realm, the United States has several options. The first, and the
most obvious, is further refocusing NATO on the emerging Russian threat.
17
See United States Department of State, "Ukraine and Russia Sanctions,” at
http://m.state.gov/mc62304.htm.
18
See “Remarks by President Obama to the People of Estonia,” September 3, 2014,
www.whitehouse.gov/the-press-office/2014/09/03/remarks-president-obama-peopleestonia.
31
Graham
In a sense, the Ukraine crisis came as a god-send, with the alliance in the
beginning stages of rethinking its mission as its involvement in Afghanistan
draws to an end. Secretary General Rasmussen has called it a "game-changer"
that compels NATO to reconsider an assumption that has guided defense
planning for the past twenty years—namely, that Russia does not pose an
imminent security threat.19
The NATO Summit in Wales illustrates how Washington will pursue this
objective. With the energetic support of East European allies, the United
States pressed alliance members at the summit to finally make good on their
earlier commitments to spend at least 2 percent of their GDP on defense, to
build up their conventional capabilities with new and more advanced
equipment, and to integrate their capabilities more thoroughly. NATO’s
summit communique particularly stressed the first two points.20
Poland and the Baltic states at a minimum will insist on more robust
contingency planning and exercises for their region, and NATO could
enhance its naval presence in the Black Sea. At the extreme, the United States
could decide to establish a permanent military presence in East-Central
Europe on the grounds that the security environment has changed in parlous
ways unforeseen in 1997, thereby effectively abrogating NATO's pledge in
the NATO-Russian Founding Act of 1997 to not permanently station
"substantial combat forces" in that region.21 While straining to remain within
the Founding Act’s boundaries, NATO moved in this direction at the Wales
Summit, when its members agreed to “continuous air, land, and maritime
presence and meaningful military activity in the eastern part of the Alliance,
both on a rotational basis.”22
Secondly, and related to first option, as many commentators are already
urging, the United States could reconsider it plans for missile defense in
Europe. In 2009, the Obama administration abandoned its predecessor's
plans to build missile defense sites in the Poland and the Czech Republic in
favor of a different architecture, termed the European Phased Adaptive
Approach. Although the administration argued then that it made the change
based on a reassessment of the Iranian threat, the initial response from
19
See NATO Secretary General Rasmussen's monthly press conference, May 19, 2014,
available at http://www.nato.int/cps/en/natolive/opinions_109980.htm.
20
“Wales Summit Declaration,” www.nato.int/cps/en/natohq/official_texts_112964.htm.
21
The text of the Act is available at
http://www.nato.int/cps/en/natolive/official_texts_25468.htm.
22
See the Wales Summit Declaration.
32
The Dangers of a New Containment Policy for Russia
Moscow was positive. (Moscow's position turned negative after it analyzed
more fully the capabilities of the new system.) The administration could now
decide to build a more robust and capable system in Europe. And it could do
that even if the ongoing P5+1 negotiation with Iran lead to a deal on its
nuclear program; conceptually, missile defense was intended to defend
against a broader range of threats than those from Iran and North Korea, the
countries of immediate concern.23 As part of that effort, the United States
could locate more facilities in East-Central European states, including, at the
extreme and most provocative, in the Ukraine. Along with the facilities
would come at least a small permanent contingent of American military
personnel, which would reassure the host governments of the United States'
commitment to their defense.
Thirdly, the United States could further bolster its bilateral defense
cooperation with former Soviet states, especially Azerbaijan, Georgia,
Moldova and Ukraine. There will be some pressure for the administration to
press for NATO membership action plans for Ukraine and Georgia,
although that remains a non-starter, given German attitudes, in particular,
and given the situations on the ground in both countries. Nevertheless, the
United States, alone or in cooperation with some allies, could help enhance
the capabilities of these and other former Soviet states though programs
similar to the train and equip program the Bush administration conducted
with Georgia. Closer intelligence cooperation—especially on the Russian
threat—could also be part of the package. After the NATO Summit, the
White House issued a fact sheet describing some steps in this direction. Two
military exercises involving Ukraine—one on Ukrainian territory—are
planned for September.24
And should the cease-fire break down and Russia go so far as to invade
Ukraine to defend ethic Russians and Russian-speakers, as Putin has
threatened and more nationalist elements of the Russian elite desire, the
United States—along with its allies—would almost certainly encourage
Ukraine to resist. They would also begin to provide the equipment—nonlethal and lethal—and intelligence support with which to do so, with the goal
of raising the prospects of a repeat of the Soviet experience in Afghanistan.
23
See the Missile Defense Agency's discussion of the threat, at
http://www.mda.mil/system/threat.html.
24
“FACT SHEET: NATO and U.S. Efforts in Support of NATO Partners, Including
Ukraine, Moldova, and Georgia,” www.whitehouse.gov/the-press-office/2014/09/05/factsheet-nato-and-us-efforts-support-nato-partners-including-ukraine-m.
33
Graham
Finally, the United States could impose ever stricter controls on technology
exports to Russia and press its allies to do the same in order to retard the
modernization of Russia's defense sector, which continues to face formidable
problems and obstacles to growth. Its domestic machine-tool industry can no
longer produce modern, advanced tools and is compelled to rely on foreign
sources, while the military has turned to imports—such as Israeli unmanned
aerial vehicles (UAVs) and the French Mistral amphibious assault vessel—for
items which it cannot obtain domestically.25 France’s recent decision to
withhold delivery of the first Mistral—the Vladivostok—reflects strong U.S.
and NATO pressure to limit arms sales to Russia that could grow in the
future.
The United States will portray all of these steps as defensive, intended to
reassure allies and to deter Russian aggression. Moscow, however, will see
them as elements of a burgeoning strategic threat. European security, which
for the past generation has been a more or less cooperative endeavor in
dealing with challenges that emanate largely from outside Europe (WMD
proliferation and international terrorism, for example) and pursuing arms
control and other confidence-building measures to ease tensions, will once
again become a competition in maintaining an appropriate military balance
between Europe and Russia in and around Europe. The danger for Russia is
that it will believe it is in an arms race, in which it starts at a significant
disadvantage: Its military is no match for NATO, whose members spend
over ten-times more than does Russia on defense and possess superior
technical capabilities,26 and who maintain that superiority while spending less
on defense as a share of GDP than does Russia. It is a race that Russia will
be no better placed to win than was the Soviet Union during the Cold War.
*
*
*
In the field of energy, the United States also has at least three major options
for pursuing two goals: diminishing Russian leverage in European markets
(Russia supplies 45 and 33 percent of the EU's gas and oil imports,
respectively, and about one-quarter of its gas resources overall27), and
25
See the International Institute for Strategic Studies, The Military Balance 2013 (London:
Routledge, 2013), pp. 207-8.
26
See Slobodan Lekic, "Despite Cuts, NATO Still Accounts for Most of the World's
Military Spending," Stars and Stripes, February 25, 2014. European NATO members spend
more than three times more than Russia does.
27
See the European Commission on EU-Russia energy relations at
http://ec.europa.eu/energy/international/bilateral_cooperation/russia/russia_en.htm.
34
The Dangers of a New Containment Policy for Russia
undermining Russia's federal budget (oil and gas account for over half of
revenues, with oil contributing 7-8 times more than does gas28).
Firstly, as many commentators have already suggested, the United States
could take advantage of the accelerating production of shale gas and tight oil
to export significant volumes into global markets. That in itself would put
downward pressure on prices to Russia's disadvantage. The implications for
European markets are less straightforward. The overwhelming share of LNG
now goes to Asian markets, where prices are higher and the infrastructure is
better developed.29 As a result, the United States—and the EU—would have
to put in place significant incentives to persuade private companies to export
to Europe.
Secondly, the United States could work toward the normalization of relations
with Iran—a development that becomes more practicable as a deal on Iran's
nuclear program approaches and both countries face the threat of the
growing power of the militant Islamic State terrorists in Iraq. Normalization
would open up the possibility of exports of Iranian gas into European
markets. That would pose much more of a threat to Russia's market position.
Not only does Iran hold the world's second-largest reserves of natural gas,
but its gas would be exported by pipelines into the very markets that Russia
now dominates in East-Central Europe. As part of this effort, the United
States and the EU would need to work together to expand plans for the
Southern Corridor, now being built primarily to compete with Russia's South
Stream project.
Thirdly, as with the defense sector, the United States could also put in place
further sanctions and restrictions on technology exports that would retard
the development of Russia's energy sector, expanding those imposed so far.
As the old fields that were first developed during the Soviet period are
depleted, Russia will have to move into geologically and climatically more
challenging regions—offshore in the Arctic and onshore in East Siberia and
in the Far East—to maintain adequate production levels. It does not,
however, possess the technology or managerial skill to develop those
Dependence varies greatly by country. The most vulnerable are the Baltic states, which rely
entirely on Russia for their gas. Germany gets over 35 percent of its gas from Russia. See
"Conscious Uncoupling," The Economist, April 5, 2014, available at
http://ec.europa.eu/energy/international/bilateral_cooperation/russia/russia_en.htm.
28
Putin said earlier this year that oil accounts for $191-194 billion in revenue, and that gas
constitutes $28 billion. See PBK, April 17, 2014, available at
http://www.rbc.ru/rbcfreenews/20140417140241.shtml.
29
See "Conscious Uncoupling."
35
Graham
resources on its own, and the only place it can get them is in the West. That
is the primary reason why Russia's energy giants, Rosneft and Gazprom, have
partnered with Western majors, such as ExxonMobil, Shell, and Total, on
projects in Russia.
To be sure, none of those three measures would have a significant and
immediate impact on Russia's energy position. It would, for example, take a
few years and billions of dollars in investment to build the infrastructure for
the export of liquefied natural gas from the United States. But over the
medium to long term, those steps would have the desired effect of squeezing
Russia on both the demand and supply side, reducing Russia's presence in
European markets, and putting pressure on its budget revenues.
Russia will be challenged to formulate an effective response. Aware of the
vulnerabilities, Putin has for some time promoted the diversification of
Russia's energy export markets, with special emphasis upon China. Indeed, as
the Ukraine crisis intensified in May, he traveled to China as if to
demonstrate that Russia had alternatives. There he made a special point of
heralding progress toward the formation of a "Sino-Russian energy alliance,"
which he said would be a critical element of energy security throughout the
Asia-Pacific region. The showpiece of the alliance is the 30-year, $400-billion
gas contract signed by Gazprom and China National Petroleum Corporation.
Under its terms, Gazprom will, beginning in 2018, gradually build up to
annually exporting 38 billion cubic meters of gas (roughly one-quarter of the
amount it now sends to Europe30). The project will entail building a
tremendous amount of infrastructure, creating, as Putin put it, "the biggest
construction project in the world, without any exaggeration."31
A decision by the United States to move vigorously against Russia's energy
sector entails serious risks. With reduced possibilities in Europe, less upside
for domestic production, and the absence of the West as operator or investor
in regions of prospective growth, Russia would find itself in a much weaker
bargaining positions vis-à-vis China. The Chinese have a well-earned
reputation for being tough negotiators, and they are not about to make
concessions simply to curry Russia's favor. (There is already considerable
speculation that, to close the gas deal, Russia made concessions on the
30
See U.S. Energy Information Administration, Natural Gas Weekly (for the week ending
May 28, 2014), May 29, 2014.
31
See Putin's remarks at the St. Petersburg International Economic Forum, May 23, 2014.
See also Alexei Anishchuk, "As Putin Looks East, China and Russia Sign $400-billion Gas
Deal," Reuters, May 21, 2014.
36
The Dangers of a New Containment Policy for Russia
issue—price—that had been holding talks up for a decade, which Gazprom
said was a "commercial secret,"32 presumably to conceal the scale of its
concessions.) Russia will likely find itself at a great disadvantage not only in
energy negotiations, but also across the board. The long-term danger is that
Russia, or at least its East Siberian and Far Eastern provinces, will become a
raw materials appendage of China.
*
*
*
Measures taken in the security and energy realms threaten to have the most
devastating impact on Russia in the medium to long term. Additionally, there
are less dramatic steps the United States could take to erode Russian power
and influence. Frustrated by Russian obstructionism, it could, for instance,
actively seek, along with its European allies, ways to circumvent the UN
Security Council in ways that reflect little regard for Russia's interests,
especially in regions where it enjoys a preponderance of force, such as in the
Balkans in the 1990s. Similarly, it could work to limit Russian influence in
other international and regional organizations, from the OSCE to the IMF
and the WTO. And it could erode Russia's development prospects by
encouraging greater brain drain by adopting more welcoming visa and
immigration regulations. Creative minds will imagine further measures the
U.S. could take in this area.
The point is that the United States has a broad range of options to counter
what it sees as a resurgent Russian threat. None of the options is cost-free,
and the administration will not decide on any of them lightly, given the
public mood against an activist U.S. foreign policy and America’s other
priorities, including the Obama administration’s expanding military action
against the Islamic State. And there are downsides that few of the most
ardent proponents of containment have considered, including, ironically, the
weakening of Russia to such an extent that it could no longer govern its own
territory effectively or serve as an effective element in creating a global
equilibrium.
Nevertheless, it would be a mistake for Moscow to discount the possibility of
a more concerted and assertive anti-Russian American policy. In the past few
months, the mood in the United States has turned on Russia. That turn came
32
See, for example, "The Politics Behind Russia-China's Gas Deal,” Channel NewsAsia, June
1, 2014, available at http://www.channelnewsasia.com/news/world/the-politicsbehind/1131860.html.
37
Graham
not as a consequence of a single act or a specific crisis, but rather as the
result of a long period of frustration in dealing with Russia and of skepticism
that it approached relations in good faith—much the way the Russian mood
about the United States has turned over the past decade. Meanwhile, the
situation in Ukraine and elsewhere along the Russia periphery remains
unsettled. There are ample opportunities for unanticipated events that could
cause all sides to overreact. Moscow might believe the United States is mired
in disarray and self-doubt, but it should remember that the American political
establishment, despite Russia's recent assertive policy, continues to consider
Russia to be in decline with a one-dimensional—and vulnerable—economy
based principally on oil and gas. Rightly or wrongly, the Washington foreign
policy establishment believes Russia will eventually succumb to American
pressure.
In such circumstances, as it develops its own policy, Moscow should never
forget that the United States still retains considerable potential to do harm to
Russia. That does not mean Washington is seeking confrontation. It is not,
especially given the other challenges it is facing around the globe. Thus, even
if tension will likely remain high for some time whatever the outcome in
Ukraine, Russia still has an opportunity to avoid a determined U.S. effort at
containment.
38
TARGETED SANCTIONS WITH AN
UNCLEAR TARGET
By Igor Yurgens
Russia’s relations with the West entered a new and less-than-happy chapter
earlier this year. U.S. and European economic sanctions are the defining and
consistent feature of this new chapter, though Russia’s actual and potential
responses are becoming increasingly important.
So far, Russia’s “internal diseases” have harmed it much more than Western
sanctions. Likewise, the sanctions do not undermine the stability of the
Russian political regime. On the contrary, the “personal” sanctions
contribute to the Putin-driven soft nationalization of the elites, and the state
can more than make up for financial losses sustained by certain individuals
and companies. For the elements of Russian society already dissatisfied with
the Russian government, such sanctions are a “bonus” of sorts that adds to
their satisfaction over the Crimea annexation—Russia gets Crimea and
despised elites are punished too.
Nevertheless, new sanctions on Russia’s financial, energy, and defense
sectors in July and September will have growing costs for key companies and
the overall economy over time. Moscow’s retaliatory ban on certain Western
agricultural imports shows that Russia is ready to engage in a tit-for-tat
economic conflict—even though Russian officials recognize the economic
asymmetries between their country and the West.
Most importantly, beginning a new chapter is not the same as ending one—
and it by no means preordains the final pages of the book. Perhaps ironically,
the harder the West tries to isolate Russia, the more Western actions will
strengthen forces inside the country that welcome isolation. This will make it
increasingly difficult to find necessary cooperative solutions to current
differences, and it is likely to increase costs on all sides.
Russia’s Economy
To start, it is necessary to understand the nature of the present-day Russian
economy. In 2013, Russia posted 1.3% growth, the worst performance over
President Vladimir Putin’s fifteen years in power except in 2009, when Russia
faced the effects of the global financial crisis. As most are aware, Russia’s
economy depends on commodity exports, which account for more than half
Yurgens
of the nation’s fiscal revenues. This has created an institutional environment
featuring excessive regulations, pervasive corruption, rent-seeking, and
exploitation of administrative barriers. The Russian government addresses
economic problems through micromanagement; this is known inside Russia
as “manual control”—direct personal intervention by the President or other
top leaders. Small- and medium-sized enterprises occupy an insignificant and
precarious position in the economy, where high administrative barriers limit
their growth. Private property rights lack adequate protection.
Against this background, a tide of social challenges is rising on a national
scale. One is the threat of depopulation. Russia’s Ministry of Economic
Development expects Russia’s able-bodied population to decline by at least
8-9% by 2020. Labor’s poor geographic mobility exacerbates the labor
shortage problem. Most experts comment on the poor quality of and
diminished access to health and education; the growth of geographic
inequality in terms of development standards and quality of life; and
depletion of the nation’s natural capital.
Despite sustained high oil and gas prices, the Russian economy has
effectively been stagnant. GDP growth has consistently declined in recent
years, from 4.3% in 2011, to 3.4% in 2012 and to 1.3% in 2013. For quite
some time, numerous sources (including Russian officials) have been
projecting, with some concern, that the economy could soon experience a
recession. In recent years, inflation has fluctuated in the 6.1-6.6% range.
Though tight monetary policies pursued by the Ministry of Finance and the
Central Bank have admittedly been fairly successful, promoting quality
growth requires keeping inflation below 3%.
Finally, efforts to open up the country for adequate investment have failed.
Russia has seen pre-crisis capital inflows ebb away as capital instead fled. In
2010, capital outflows stood at $33.6 billion, with $80.5 billion in 2011, $56.8
billion in 2012, $59.7 billion in 2013, and $75 billion in the first half of 2014.
Western Economic Sanctions
Currently, the IMF expects Russia to grow at 0.2% in 2014, while the OECD
expects a growth rate of 0.5%. The European Bank for Reconstruction and
Development (EBRD) assumes zero growth, while the Russian Ministry of
Economic Development offers a number of scenarios: 0.5% growth if the
Ukrainian situation turns out favorably, or a decline of 0.2% to 0.3% in the
worst-case scenario.
40
Russia’s Economic Policy Options
As for the sanctions, the Economic Development Ministry believes that
Russia has sufficient reserves to make up for the resulting losses in the short
term. Top Russian officials believe this too. Still, over the longer term,
economic officials recognize and acknowledge that strong sanctions could
destabilize the fiscal system and constrain technological modernization, due
to restrictions on technology imports, investment, and application of best
practices.
In March, Moody's, Standard & Poor's, and Fitch revised Russia’s ratings
because “elevated geopolitical risks and prospective sanctions … might
reduce potential investments, increase capital flight, and further weaken the
already declining economic performance.” Moody's put the long-term ratings
of Russia’s public debt on a downgrade watch list. Standard & Poor's revised
its outlook for Russia’s sovereign ratings from stable to negative, and Fitch
similarly revised its outlook for long-term default ratings of Russia’s debt in
foreign exchange and domestic currency while also downgrading major
Russian banks.
In late April, Standard & Poor's downgraded Russia from BBB to BBB-, the
lowest investment grade, with a negative outlook. Next, Standard & Poor's
similarly revised the investment ratings of Moscow, St. Petersburg33, a
number of major Russian companies (including Gazprom, Rosneft,
LUKOIL, and Russian Railways), and banks (VEB and VTB). In the cases of
Alfa-Bank and Promsvyazbank, Standard and Poor’s only revised the outlook
downward. The agency justified its decision by stating, “these companies
would be unlikely to withstand a sovereign default, considering their
significant dependence on Russia from the operational and financial
perspective.”34 During the summer, the three ratings agencies reaffirmed
their negative outlooks for Russia.
Some politicians and experts have suggested that the ratings downgrade was
itself a sanction. However, most believe that the sanctions simply hastened
rating agency decisions that would have happened anyway, as the grounds for
such actions arose prior to this spring. While “somewhat politically
motivated,” the downgrades represented a “response to actual deterioration
of our macro situation” according to Alexey Ulyukaev, Russia’s Minister for
Economic Development.
In June, the Russian regions' movement on the Fitch scale was mixed.
In June, S&P slammed lesser players in the Russian financial market; more than half of
them (18 out of 32) saw a downward outlook revision.
33
34
41
Yurgens
Experts believe that a perceptibly higher cost of any external funding for
Russia represents a major negative effect of even the “softest” sanctions
regime. Foreign loans have been very popular among major Russian
businesses to date, given their lower rates and “debt service costs.”
According to Bank of Russia statistics, such facilities have accounted for
almost nine-tenths of Russia’s aggregate external debt (i.e., $653 billion out of
$732 billion).
Likewise, there has been a marked deterioration of the environment for new
initial public offerings and Eurobond placements against a generally livelier
IPO scene in Europe and Asia. In early March, London Stock Exchange
flotation of Lenta, a major Russian retailer, precipitated a dramatic drop in its
share price. Promsvyazbank, TKS Bank, Bashneft, and Detsky Mir
postponed scheduled offerings.
As president of the All-Russian Insurers’ Union, I continuously monitor this
sector of the domestic financial market. So far, the sanctions have yet to
become the primary concern for Russian companies. Ruble depreciation,
declining capitalization, and reduced corporate budgets (leading to cuts in
insurance costs) have clearly damaged market players in the insurance sector.
However, I believe we would still be tallying losses in this area even if Crimea
had not happened.
Nonetheless, potential downgrades of Russian insurers' international ratings
and, going forward, new limits on assumption of Russian reinsurance risks
do pose a serious challenge for us. The relatively shallow Russian insurance
market is heavily dependent on international reinsurers. So far, corporate
insurance remains the only consistently profitable market segment.
Difficulties in obtaining reinsurance indemnity from Western partners and
resultant bankruptcies of Russian insurers would deal a very heavy blow to
the domestic market.
The “sanctions regime” is also suspending various processes and postponing
decisions crucial for promoting Russia's economic interests. As early as
March, the European Commission de facto froze a decision that would have
exempted the OPAL gas distribution system in eastern Germany—it
transports imported Russian gas southward from the Baltic Sea—from some
regulations in the EU’s Third Energy Package. The South Stream project is
running into ever-greater obstacles, and Bulgaria has announced the project’s
suspension, pending approval by the European Commission.
42
Russia’s Economic Policy Options
Despite some differences in their approaches to sanctions, the United States
and Europe have both imposed tight restrictions on any business operations
involving Crimea. Although the annexation of Crimea creates mainly local
economic challenges for Russia, those challenges are nevertheless exceedingly
difficult. Baseline conditions in Crimea, which used to be at least as good as
they were across Russia, dramatically worsened in March 2014. Nowadays,
Crimea means worn-out infrastructure, a lack of natural resources,
dependence on Ukraine for both, inability to raise Western investment, plus
vulnerable and tenuous summer tourism that serves as the key pillar of the
regional economy and of the livelihoods of a majority of local residents. At
the same time, major Russian companies cannot enter the Peninsula directly
without risking a Western response.
Russia’s development plan for the new Crimean Federal District keeps
getting costlier with every successive iteration. At this point, the Russian
government has fixed spending at about $20 billion through 2020, but the
actual amount of spending will doubtless keep growing. For instance, the
estimated cost of the bridge across the Kerch Strait has risen from $3 billion
to $4.3 billion to nearly $6 billion. During the design and engineering phase,
and during potential construction, the cost will probably escalate again more
than once.
Economic losses from Russia’s damaged relationship with Ukraine have
further tilted the balance. Kiev’s “European choice” made some losses
unavoidable, but Moscow has done its best to maximize such losses. Clearly,
Ukraine’s own losses will be much more serious, given the different scale of
the two economies and the nature of their relationship. However, Russia will
also lose a lot—e.g., a major source of raw materials, rolled steel, and
machinery components, including defense items.
Russian assets in Ukraine, worth at least $30 billion, are now at risk. In late
April, a court seized an Odessa refinery that the Russian bank VTB had
obtained by way of loan recovery from Sergiy Kurchenko, a fledgling
Ukrainian oligarch and ally of former President Viktor Yanukovych who is
now a fugitive. Mass-scale asset divestment will probably not happen, but
many businesses will find it harder to operate. Ukraine’s role as an interim
transportation link between Russia and Europe (and, via the Black Sea ports,
other global regions) will probably weaken as well.
Since the tragic crash of Malaysian Airlines Flight 17, European leaders have
substantially reconsidered their attitudes toward sanctions against Russia. The
dominant viewpoint in the United States and the EU is that while separatists
43
Yurgens
are directly to blame for the downing of MH17, the Kremlin is the main
culprit. The EU’s subsequent adoption of limited, so-called sectoral
sanctions, the third and most painful round of sanctions, signals that the
conflict between the West and Russia has gained considerable momentum.
As a result, Russia faces U.S. and EU economic machines comprising 800
million people on both sides of the Atlantic who together produce half of the
world’s wealth. Accounting for just 2% of global GDP, Russia can hardly win
such a boxing match—particularly since more than 50% of Russia’s trade
turnover is with the European Union. Taxes on the EU’s energy imports
make up almost half of Russia’s federal budget.
Now, Russian state banks, energy monopolies, and defense companies could
be seriously hurt. Refinancing state companies’ $200 billion in debt will
already create a serious problem; according to estimates from former Vice
Prime Minister Kudrin’s think tank, underinvestment and capital flight
caused by the sanctions scare will deprive the Russian economy of another
$200 billion. Russian economic experts believe we risk losing up to one-third
of our annual budget next year due to international sanctions, in the worstcase scenario.
Still, Russia can live with sanctions for the short term. Oil exports still
guarantee us a relatively steady flow of income, and hard currency and gold
reserves remain at around $500 billion. But the sanctions will eventually hit
hard. Both domestic forecasts and estimates from the International Monetary
Fund and the World Bank put Russia’s GDP growth at 0.2%, with a
probable recession looming. Restrictions on much needed Western
investments and technology is a serious impediment.
Meanwhile, the sanctions have also solidified Russia’s new and unfavorable
position in the system of Western-dominated international, political, and
economic relations. Though Russia is not yet considered a rogue nation,
many in the West clearly see it as a problem country and an unhelpful actor.
Such positioning contributes to worsening conditions on the domestic
economic front.
Russia’s Responses
Notwithstanding the increasing impact of sanctions, President Putin is not
likely to change his policy approach under pressure. As Russia’s officials see
it, the Iran sanctions and Cuba embargo demonstrate that such a situation
can persist for quite some time, especially since Russia is a relatively large and
44
Russia’s Economic Policy Options
wealthy country. With this in mind, the Putin government will not give in to
Western sanctions, but will instead look for ways to minimize their impact on
Russia and to ensure the survival of the current political and economic
system in Russia.
Domestically, Putin will try to rally the Russian elite and population around
his idea that “Russia is a besieged fortress.” Although it may seem strange to
Americans and Europeans, this may actually become an easier sell for Putin
as sanctions become more severe, for two reasons.
First, tough sanctions will do real damage to Western-oriented
internationalists inside Russia. Although there is a new generation of Russian
business leaders and so-called global Russians who find Western values to be
highly compatible with their mode of life, this group was relatively weak even
before the Ukraine crisis. Sanctions have further reduced their voice in
debates over Russia’s internal affairs. To stage a comeback, they will have to
have some breathing space—something impossible under sanctions that
reduce economic opportunities and distort Russia’s political climate. Under
harsh and continuing sanctions, this new generation will become weaker and
weaker. Russia’s Western-oriented economic elite cannot thrive in isolation
from the rest of the world, and Western officials should take note of this.
Second, the isolationists around Putin who do not see their future in the
wider world are already numerically and emotionally stronger than are
modernizers and progressives—and this problem will get worse the longer
the sanctions last. That is why the actions already taken by the West have
caused a surge of enthusiasm among Russian isolationists. Kremlin efforts to
mobilize their support in order to strengthen the political order will further
empower them.
Neo-conservative Russian isolationists are already influential around
President Putin. In the absence of any visible carrots from the West, using
the stick endlessly will only strengthen the neo-conservative segment of the
Russian elite and population. Russia today is far from the Iranian situation,
where the supreme leader decided to avoid selecting a belligerent president to
make negotiations possible. In Russia, the current situation can persist for a
relatively long time, although the country already feels a strain on its budget
and public expenditures.
Internationally, the sanctions regime has forced Moscow to look more
intensely for new markets and new lenders. The Russian President's recent
visit to China is evidence of this. Deeper cooperation with China will have
45
Yurgens
costs for Russia—energy experts quickly discovered the secret price per
cubic meter of Russian gas deliveries to China, and it was not what Moscow
hoped for in the past. The political price for Russia of current and future
Russian-Chinese agreements is anyone's guess.
The incumbent Russian leadership is unlikely to have any immediate interest
in becoming too dependent upon China. However, it may perceive it as the
lesser of two evils, as traditional sources of “stability,” the highest value of
social life in present-day Russia, are gradually drying up. This forces the
government to look for new sources of stability. Russians are already
debating the scenario of “Russia as a Chinese political satellite and economic
periphery” in earnest, even if most are not yet prepared to accept it.
Russia’s recent restrictions on agricultural imports from countries that have
imposed sanctions show that Moscow is ready to retaliate economically
against the West; beyond this, Prime Minister Dmitry Medvedev has now
threatened to restrict access to Russia’s airspace. What are the Russian
options if the confrontation over Ukraine continues to worsen?
One of the most visible proposals is the Glazyev plan, prepared by Sergey
Glazyev, a Russian presidential advisor on economic matters who has been
responsible for Russia’s integration plans vis-à-vis Ukraine. Mr. Glazyev has
proposed a series of steps to increase Russia’s independence from Western
economies and to attempt to damage these economies in the process. His
proposed measures included the following:
move government assets and accounts denominated in U.S. dollars
and Euros from NATO countries to neutral nations;
sell NATO nations’ bonds;;
return state-owned property to Russia;
stop exports of precious metals, rare earths, and other strategic
metals and minerals;
execute currency and credit swaps with China to finance critical
imports;
build a SWIFT-like domestic system for interbank informationsharing within the Commonwealth of Independent States, along with
a domestic payment system;
work to introduce a capital flight tax;
gradually transition to domestic currency settlements vis-à-vis trade
partners;
46
Russia’s Economic Policy Options
radically reduce the share of U.S. dollar instruments and debt of
other pro-sanctions nations as a percentage of Russia’s foreign
currency reserves;
replace U.S. dollar and Euro-denominated loans of state-owned
corporations and state-owned banks with ruble-denominated loans;
and,
transfer offshore-registered titles to strategic enterprises, and transfer
mineral rights, real estate, and other property back to domestic
jurisdiction.
Russia’s neo-conservative isolationists generally support these measures,
which would seek to move Russia’s assets and transactions away from dollars
and Euros toward other currencies, develop a parallel international financial
system, force Russian businesses and their assets and investment to return to
Russia, and keep “strategic minerals” in the country.
Sophisticated Russian economic experts, such as former Deputy Prime
Minister Alexei Kudrin, have opposing views. They argue that retaliatory
measures like these would immediately cause greater losses to the Russian
economy and to Russian consumers. However, they say, the best
“retaliation” is a “pivot to Asia” and to other emerging economies. The goal
of this pivot would be to increase Russia’s finance and trade ties with
sovereign funds and public companies from Asian, Latin American, and Arab
countries willing to expand their exposure to Russia. Work in this direction
has already begun, though it will be difficult to replace the 80% of foreign
direct investment in Russia that comes from countries imposing sanctions.
Russia also has some other options. First among them is economic retaliation
against Ukraine, which Moscow is already doing as part of a wider effort to
destabilize that country. Russia has halted trade of more than one-hundred
agricultural commodities and industrial products. Moscow has also frozen oil
and gas deals and started to look for substitutes for military equipment
imported from Ukraine in the past. Russia could still do much more.
Ukraine is highly vulnerable because its financial outlook is tragic. Its budget
deficit and external debt service require nearly $30 billion. Covering
development and recapitalization and addressing structural imbalances in the
economy will take almost $200 billion through 2018 due to long-term
47
Yurgens
underinvestment, according to some expert views.35 These gigantic amounts
are simply unavailable to the European Union, Russia, and Ukraine, even if
the United States had the political will to assist. But if nothing is done, the
“black hole” of Ukraine’s economy in the center of Europe will drag down
the country’s westward and eastward integration and will constitute a longterm economic threat to all. In order to overcome the crisis and the fractures
in Europe, it is necessary to create a new platform for cooperation. Both the
EU’s Eastern Partnership and Russia’s Eurasian economic integration require
serious correction.
This may sound unrealistic in the current political environment, but there is
no alternative. Moreover, saving Ukraine could actually be the best project to
transform the “sanctions regime” back into a “cooperation regime,”
something much healthier for the European and global economy. Of course,
this will not be possible until governments on all sides—not only Russia—
are prepared to adjust their policies.
Russia’s most serious economic weapon—restricting oil and gas deliveries to
Europe—is a double-edged sword. There is no easily available buyer of this
product in Asia because new pipelines or railway deliveries will take years to
build. Likewise, export facilities for liquefied natural gas are also pretty
scarce. At this point, nobody in his senses openly speaks in favor of cutting
off gas supplies to Ukraine, which might take away up to one-quarter of
Russia’s federal budget revenues directly or as collateral damage.
Nevertheless, Russia could still do this if the conflict deteriorates enough to
make the Kremlin’s alternatives look even worse. From this perspective, it
can be very dangerous to put too much pressure on Russia.
So far, most Russian experts have expressed concern that the Russian
Federation cannot respond to Western sanctions without exacerbating the
economic damage caused by them. Any actions taken by Moscow to curtail
economic and technological cooperation, and any restrictions imposed on
Western businesses in Russia would entail immediate losses to the nation's
citizens, domestic businesses, and government. Nevertheless, if Russia’s
isolationists gain sufficient political influence, these experts may no longer
have significant input into policy formulation.
35Kulik
S., Spartak A., Vinokurov E., and Igor Yurgens, “Two Integration Projects in
Europe: Dead End of Struggle,” INSOR, a summary of a report commissioned by the Civic
Initiatives Committee, Moscow, June 2014
48
Russia’s Economic Policy Options
Russia has not yet reached this point. In late May, President Putin used the
St. Petersburg Economic Forum as a platform for direct dialogue with
Western businesses. He clearly intimated that, so far, the Kremlin does not
view an isolationist program as a serious option. Putin insisted that, even in
the new environment, Russia intends to follow the motto of “partnership for
global development.” Speaking of sanctions, he lamented that “inability to
find compromises, unwillingness to take into account partners’ lawful
interests, and blunt use of pressure only add to chaos and instability and
create new risks for the international community’s continued development.”
As he spoke to established Western investors in Russia, Putin asked
rhetorical questions. Why do “successful businesses have to suffer losses and
relinquish to competitors this huge market and the positions they had built
up?” Further, “Does anyone gain from disruptions to regular cooperation
between Russia and the European Union? Does anyone gain from seeing our
joint work come to a standstill on what are important issues for everyone
such as nuclear safety, fighting terrorism, trans-border crime, and drug
trafficking, and other priority issues? Is this supposed to make the world any
more stable and predictable? Surely it is clear that in today’s interdependent
world, economic sanctions used as an instrument of political pressure have a
boomerang effect that ultimately has consequences for business and the
economy of the countries that impose them.” These pronouncements were
completely devoid of any pro-isolationist enthusiasm.
The primary effect of international sanctions is partial or complete isolation
of the sanctioned nation. Russia is too big to isolate completely, however,
and partial isolation is likely to have unintended consequences that contradict
U.S. and European intent in imposing sanctions. Should the West strengthen
isolationist forces in Russia and provide incentives for Russia's “pivot” away
from the West toward China, Latin America, and Africa? This is up to
Washington and Brussels.
49
RUSSIA, UKRAINE, AND
U.S. ECONOMIC POLICY
BY BLAKE MARSHALL
Preface
The crisis in Ukraine pitting Russia against the West reveals competing
narratives regarding precipitants of and reactions to the February ouster of
Viktor Yanukovych and the troubling episodes that have since unfolded in
Ukraine’s south and east. This paper will assess the economic context of U.S.
decision-making in response to the crisis in Ukraine, examining what is at
stake economically for both the United States and Russia, the policies
pursued and their potential consequences, and options to consider going
forward.
Introduction
For nearly a quarter-century since the breakup of the Soviet Union, the
United States and Russia have struggled to adapt to changes to the
international system brought about by the Soviet collapse, the end of
bipolarity, and the departure from the ‘stability’ of the Cold War era. The
Cold War may have been expensive and dangerous, but it was also at least
somewhat predictable. Analysts and decision-makers grew comfortable
operating within a governing framework of organizing principles built over
decades.
The purpose and predictability of that framework were not replaced by a set
of equally convenient parameters for U.S.-Russia engagement. The bilateral
relationship ebbed and flowed through periods of ‘warmer’ ties, which were
occasionally buttressed by shared interests, although they were frequently a
function of leadership personalities and the relief felt by the absence of
conflict. As Russia emerged from a decade of upheaval that was the 1990s,
opportunities for more serious common pursuits between Moscow and
Washington emerged, yet so too did divergent national interests that were
not fully understood without the benefit of hindsight. Cooperative successes
were achieved, yet competition and conflict also endured.
A decade ago, in June 2004, the Orange Revolution in Ukraine introduced a
new variable into Russia’s relations with the West. The view of the world
from Moscow changed suddenly and significantly, and subsequent discussion
of a NATO Membership Action Plan for Ukraine ensured that this was not a
Marshall
fleeting concern in Moscow (and the August 2008 Russia-Georgia war
confirmed for U.S. policymakers that we had indeed entered a new phase in
the relationship). Through electoral gaming, exertion of economic influence,
and leverage of energy supplies, Russia and the West competed in a
sometimes subtle and lengthy tug-of-war over Ukraine, culminating in the
bidding war between the EU and the Russia-led Customs Union (now the
Eurasian Economic Union) last fall, which precipitated the crisis in Ukraine.
As pro-EU and anti-Yanukovych protests transformed Kyiv’s Independence
Square into the Maidan movement in late 2013, few on either side could have
envisioned where U.S.-Russian relations would be in mid-2014, in the midst
of the worst crisis since the end of the Cold War, with Ukraine engulfed in a
low-grade civil war.
Russia’s Economic Backdrop
Russia’s Ukraine strategy and the annexation of Crimea in particular have
been a boon politically for President Putin at home, as his approval rating
soared to 72% in March, 82% in April, and 83% in May. But this conflict
comes at a time when Russia can least afford it economically. Russian
economic performance has deteriorated since its recovery from the global
recession, and the country’s economy has been sliding into a period of
stagnation for more than a year now. Whereas Russian GDP grew 3.4% in
2012, growth declined to 1.3% in 2013. The projections for 2014 began at an
optimistic 2.5%, but the consensus view has since been reduced by half—to
approximately 1.1-1.3%, with the OECD’s revised projection on the low end,
at 0.5%.
These estimates are not weighted for Ukraine-related risks and impact.
Leaving aside the effects of investor behavior and punitive actions taken
against Russia, the best-case scenario growth projection hovers around 1.3%.
When potential fallout from Ukraine is factored in, this is commonly viewed
as enough to tip Russia into recession, with expected performance dropping
to -2%. The IMF already considers Russia to be in recession.
Bloomberg recently conducted a survey of 10 economists, who assessed the
probability of a Russian recession occurring this year to be 33 percent. This
same group of economists largely concurred that the consumption effect
supporting Russia’s recent rebound has run its course, and that the primary
driver of any near-term economic growth must be investment.
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Russia, Ukraine, and U.S. Economic Policy
In the second quarter of 2014 (Q2), the Russian economy grew by .8% yearon-year (y-o-y) compared to Q1 2013, the slowest pace in five years since the
recession, which followed .9% y-o-y growth in Q1 and a contraction of .5%
from Q4 2013. Russian and international observers agree that declining
investment is the culprit—Russia’s own Ministry of Economic Development
reported that fixed capital investment declined 4.8% in April y-o-y.
Russia desperately needs investment to fulfill the sustainable growth
imperative and to diversify away from the dominance of the oil and gas
sector. Whether ‘real’ foreign investment or repatriated Russian capital (for
example, from Cyprus, perennially one of the top ‘foreign’ investors in
Russia), capital inflows are the single largest factor impacting Russia’s
economic development in the near term. As discussed below, this is the
reality in which policy responses to Russia are being formulated, which in
turn has Russian officials devising mitigation strategies and countermeasures.
Interdependence in a Global Economy
The U.S.-Russian economic relationship features only a limited degree of
interdependence, at least when analyzed against the likely effectiveness of
U.S. sanctions as a strategy in itself—hence the importance of a coordinated
multilateral approach with the full support of the EU, in particular.
U.S.-Russian bilateral trade remains relatively small compared to both
countries’ trade with the EU or China, for example, but the bilateral
commercial relationship has experienced a period of rapid growth in recent
years, as American and Russian firms alike have benefitted from expanded
ties and the development of new markets. After totaling just $24 billion in
2009, U.S.-Russian trade jumped by one-third, to $32 billion, in 2010, and
increased again by a similar proportion in 2011 to $43 billion. Since then,
however, two-way trade declined to $40 billion in 2012, and dropped another
5%, to $38 billion, in 2013. This year’s performance to date is roughly in line
with 2013 (approximately $9 billion in Q1).
Each country ranks among the top 25 of the other’s trading partners (e.g.,
Russia is the 23rd-largest trading partner of the U.S.). While these are not
huge export markets, it is also true that the trade relationship has historically
tilted in Russia’s favor, with the U.S. running a considerable trade deficit due
to imports of Russian commodities (including primarily oil, steel, chemicals,
and precious metals). As a result, while the Russian market for U.S. goods
and services has continued to expand in the first two years of Russia’s WTO
53
Marshall
membership, it is safe to assume that a smaller swath of Russian companies
has more at stake in terms of potential trade disruptions than do their
American counterparts, at least in the short run (though many U.S.
companies have moved well beyond an initial trading strategy to build market
share and are now major strategic investors in Russia for the long term).
By contrast, Europe is Russia’s largest trading partner. The comparisons to
EU-Russia trade bring into stark relief the importance of a coordinated
policy response between the United States and Europe. Russia’s trade with
Europe is more than tenfold the U.S. level, at $440 billion, with the EU
representing roughly one-half of Russia’s imports and exports. Threequarters of Russia’s exports to Europe come from its energy sector, as
Europe imports roughly one-third of its natural gas from Russia (and half of
that amount transits through Ukraine).
More specifically, Germany has been a driving force behind European policy
on Ukraine due in large part to both its economic clout and its commercial
stakes in Russia. Russian-German trade was $111 billion in 2012, before
declining to $105 billion in 2013. Also, unlike the U.S. trade deficit, German
exports nearly equal the imports from Russia. German business leaders have
noted that some 300,000 German jobs depend on the country’s economic
relationship with Russia. And energy supplies are a primary constraint on
decision-makers, as Germany receives three-quarters of its oil and gas from
Russia.
Beyond the trade case, equally compelling are the investment data
underpinning the EU-Russian economic relationship. Roughly 75% of FDI
into Russia originates in Europe, and some 6,000 German companies alone
are said to have staked an active presence in the Russian market.
The comparison to the EU’s economic clout vis-à-vis Russia clearly
establishes the logical difficulty of enacting a unilateral American sanctions
strategy that will achieve its desired objectives.
Vulnerabilities and Costs
Given Russia’s increasing integration into the global economy and the vital
link between Europe and Russia, it is not surprising that economic leverage
emerged as the primary tool in a coordinated U.S.-European policy response
to Russia’s aggression in Ukraine.
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Russia, Ukraine, and U.S. Economic Policy
The question, then, is how leverage should be applied in a manner that is
based upon realistic assumptions; i.e., how can and should influence be
exerted, and toward what end(s)? Once the mechanics of inflicting ‘pain’ on
Russian targets are confirmed, what are the costs associated with the action,
beyond just the intended target scope—how are they felt and by whom?
Just as certain sanctions or the threat of them, if deployed properly, could
impose severe costs on Russia, it is also reciprocally true that Russia’s
importance to the EU economy and its energy supplies poses serious
constraints on how far the EU will move against Russia while simultaneously
incurring self-inflicted pain.
As sets of Western sanctions are debated, implemented, and expanded, the
calculations then shift to Moscow, where President Putin weighs the
perceived costs against his objectives on an issue that he considers to be of
fundamental strategic importance. It could be that Russia is willing to incur
great costs without immediately changing course, as Ukraine is the
centerpiece of regional security from Russia’s perspective.
U.S. Policy: The Path Taken
Ultimately, the goal of U.S. policy should be to elicit changes in Russian
behavior, deescalate tensions, and promote a dialogue between Russia and
Ukraine in pursuit of a long-term and lasting resolution.
In the run-up to Russia’s annexation of Crimea in March, U.S. policymakers
and their EU counterparts decided on a two-track response: international
isolation of and economic pressure on Russia. The goal of the Western policy
response was to punish Moscow and to deter further Russian aggression. But
from the outset, the strategy and tactics have suffered from a lack of clarity in
both their overall intention and their intended targets. They have also
suffered from a timing problem, in that the United States and Europe are
seeking to change short-term behavior by imposing costs that escalate over
time and that are most significant for Russia in the medium- to long-term.
The first steps to isolate Russia in the international arena consisted primarily
of what the United States and Europe will not do—in other words, to
demonstrate that partnership with Russia has become a thing of the past.
The first measure, canceling the G-8 summit that Russia planned to host in
early June, effectively expelled Russia from the top-table body in favor of
reverting to the G-7 format for the foreseeable future. Other U.S. steps
included putting bilateral trade and investment talks and military cooperation
55
Marshall
initiatives on-hold, as well as canceling planned meetings of the U.S.-Russian
Bilateral Presidential Commission. On the multilateral front, talks on Russia’s
OECD accession were suspended.
Russia’s response to these steps was rather predictable and was primarily
rhetorical in nature. It consisted of dismissing the importance of some
international forums such as the G-8 while combating attempts to unify the
Western position. Russian officials made clear that Russia has many trading
partners and interlocutors, and that bilateral “boycotts” of previously
planned initiatives were unfortunate unilateral decisions to not further
develop economic opportunities in and with Russia.
The second set of measures was seemingly developed as a hybrid of the dual
track: to both isolate Russia and prominent Russian individuals and to exert
economic pressure. An executive order on March 6 put in place sanctions in
the form of visa bans and asset freezes against those directly involved in
Crimea; additional Russian officials and other figures close to President Putin
were subsequently designated on the list. The visa bans are of limited utility if
they merely restrict travel to the United States, but these travel prohibitions
constituted a greater nuisance when the EU followed suit within hours and
issued its own list. In themselves, these steps would get Russia’s attention but
would not influence Russia’s position. They quickly became viewed as a
potential irritant, but not as an actual inconvenience. The Russian response,
accompanied by derisive rhetoric, came in classic tit-for-tat diplomatic
fashion, with American officials and others soon identified as ineligible for
Russian visas.
The second set of U.S. responses represented a step up on the severity scale,
as the March 6 executive order provided for asset freezes and a prohibition
on U.S. persons from doing business with the “specially designated
nationals” (SDNs) and entities on the sanctioned list. The initial list of SDNs
was quickly expanded within three days to include individuals outside the
Russian government and entities whose principals are close to President
Putin, including Gennady Timchenko, Arkady Rotenberg, and Bank Rossiya.
Additions made to the list in late April included Rosneft CEO Igor Sechin,
Rostec CEO Sergey Chemezov, and numerous entities within Gennady
Timchenko’s Volga Group.
The Russian response to these sanctions was more worrisome to the U.S.
business community. Anti-American sentiment escalated, as reflected in the
polling trends—from 44% negative bias in January to 71% in May.
Commercial retaliation was proposed in the Federal Assembly in the form of
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a draft law permitting confiscation of assets of American and European
companies in Russia. When Visa and MasterCard declined to process
transactions for Bank Rossiya subsidiaries, the Russian government
announced an accelerated plan to develop and implement a Russian national
card payment system.
Concurrent with the SDN list expansion on April 28, the United States also
announced new restrictions on high-tech defense exports to Russia, noting
that current export licenses for defense or dual-use technologies that could
contribute to Russia’s military capabilities would be revoked and pending
applications for export licenses would be denied. The Russian response
echoed the Cold War-era rivalry with the U.S., with a reciprocal threat to
discontinue sales of Russia’s RD-180 rocket engines for U.S. space launch
programs, as well as plans to remove GPS stations in Russia.
The mid-March sanctions list and the April addendum also indicated the
direction in which the U.S. administration was heading as it threatened
further sanctions if Russia refused to halt destabilizing actions in eastern
Ukraine. President Obama’s executive order provided a framework for
implementing subsequent sanctions as needed: a third wave of more severe
sanctions targeting five key sectors of the Russian economy, including
defense/high technology, energy, engineering, financial services, and
metals/mining.
The administration proceeded on this path in July, though the third round
did not constitute full sectoral sanctions that prohibited U.S. companies from
conducting business in these sectors. Rather, the July steps introduced
restrictions on new financing to several banks and energy firms while adding
select defense enterprises to the SDN list. Russia responded in August by
banning the importation of U.S. agricultural products for one year. Though
Russian imports of many American agricultural products (especially meat)
have declined in recent years, Russia still represents 10% of U.S. agricultural
exports, accounting for some $1.3 billion in sales.
Russia’s consumer safety agency subsequently closed 12 McDonald’s
restaurants and launched investigations of dozens of others for health and
sanitary violations, which was widely perceived as symbolic retaliation (the
action against the American fast-food chain included closing the first
restaurant opened in 1990 on Moscow’s Pushkin Square). By early
September, Rospotrebnadzor’s initial health inspections resulted in the
opening of some 80 administrative cases against McDonald’s across Russia.
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Following the NATO Summit in Wales in the first week of September and a
tenuous cease-fire in Ukraine, U.S. officials indicated that Washington is
“finalizing” new sanctions in coordination with the European Union.36
Further measures have since been put in place.37
U.S. Policy: What Next and Why?
An assessment of this two-pronged approach should include not only
examination of its effect on desired outcomes but also a clear sense of where
the policy is heading along a continuum—an if-then matrix of conditionals
that prescribe likely next steps and that are understood by various
stakeholders.
That concept, at least in its public form, has been lacking in U.S. policy
toward Russia in the past few months, specifically with regard to a
progression in stepwise sanctions. Policy clarity and public articulation have
not kept pace with the rapid developments on the ground and the ongoing
fluidity of the situation in Ukraine. In turn, that has made steadfast support
more difficult to maintain in American domestic politics, within the U.S.
business community, and among transatlantic partners.
There have been several instances when both the trigger for sanctions and
their ultimate objective have been subject to differing interpretations. First, in
the Crimean case, the initial sanctions were announced in March to hold
accountable those responsible for coordinating Crimea’s secession and
Russia’s annexation of the territory. These steps were, however, accompanied
by public statements and pressure from Congress seeking the reversal of the
outcome in Crimea as the goal of U.S. policy. If the failure to undo the
annexation and to return Crimea to Ukraine were the trigger for an escalating
series of sanctions, then clearly sectoral sanctions would have been
implemented much earlier in the spring.
By the time the reality of Crimea’s new status had been absorbed (if not
recognized), at least for the short run, unrest in eastern Ukraine quickly
spiraled into a similar scenario. The scenario was similar not in cultural and
historical terms, but in terms of mechanics and modus operandi—separatist
seizure of local government facilities, hurriedly staged votes for
Rebecca Shabad, “U.S. ‘finalizing’ new sanctions against Russia,”
http://thehill.com/policy/international/217133-us-finalizing-new-sanctions-against-russia.
37 David Jackson and Oren Dorrell, “Obama team unveils new Russia sanctions,”
http://www.usatoday.com/story/news/nation/2014/09/12/obama-russia-sanctionsvladimir-putin/15502067/.
36
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independence, pleas for Russian support, and well-equipped forces securing
key infrastructure and transport routes.
In the case of eastern Ukraine, the threshold for implementing sectoral
sanctions has been specified over the past months in various terms,
including, among other things: 1) Russian attempts to disrupt Ukraine’s May
25 presidential election, 2) Russian support for further destabilizing actions in
eastern Ukraine, 3) Russia’s failure to withdraw its forces from forward
deployment in regions bordering Ukraine, and 4) a Russian cross-border
incursion into Ukraine.
When Russia began the process of withdrawing its forces and accompanying
equipment from the border and returning them to their home bases, it left
the impression that this succession of markers had passed without an overt
violation requiring a response. In some sense, then, the policy could be
deemed to have been effective, at least insofar as it deterred the worst-case
scenarios involving a Russian invasion of eastern Ukraine. It could also be
argued that the threat of sectoral sanctions was not a determining factor in
President Putin’s decision to withdraw Russian forces from the border. While
the spring campaign evidenced rapid rollout of preconceived plans and
Spetsnaz-like tactical elements, it is likely that, in strategic terms, President
Putin is contemplating a series of long-term moves, as in a lengthy game of
chess.
In any event, the presidential election in Ukraine on May 25 was considered a
limited success under the circumstances, but the situation on the ground in
eastern Ukraine did not improve in the election’s immediate aftermath—if
anything, the sporadic separatist clashes evolved into a coordinated, quasimilitary conflict. Following a G-7 discussion in Brussels and a series of
exchanges among heads of state in France in the first week of June, a
window for peace talks and an accompanying ceasefire opened briefly.
Prior to June 10, momentum was building in Europe (and, to a lesser degree,
in the U.S.) for recalibrating policy based on a fresh appraisal of the costs and
benefits associated with a potential third round of sectoral sanctions.
Officials and observers alike pointed to the absence of an overt cross-border
incursion, Russian troop withdrawal from the border territories, and the
inauguration of President Poroshenko and Russia’s subsequent recognition
of him (including a brief meeting with President Putin).
The respite was short-lived. On June 11, a column of Russian tanks
reportedly crossed the border into eastern Ukraine through a separatist59
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controlled checkpoint in the Luhansk region. Days later, on June 14,
separatists downed a Ukrainian transport plane, killing all 49 servicemen
aboard. On June 16, Gazprom announced the cutoff of gas supplies to
Ukraine due to nonpayment issues. Amid sharp deterioration of the
conditions on the ground, the United States announced new sanctions in
mid-July, only to witness a new and tragic turn in the conflict with the
downing of Malaysian Airlines Flight 17 in eastern Ukraine, apparently as the
result of an accidental missile attack by separatist forces.
These developments and Russia’s deepening incursion in Ukraine prior to
the recent cease-fire led to tougher sanctions to hold Russia accountable, and
there is a growing bipartisan consensus in Congress in favor of the U.S.
acting unilaterally, if necessary. Given this context, the following section of
this paper examines core principles and objectives in sanctions policy.
U.S. Sanctions Policy
Of the several principles underpinning successful sanctions policy, two
warrant particular discussion in this case: specific targeting, as opposed to a
misdirected or blanket approach; and strong consensus behind a uniform
multilateral policy, as opposed to mixed menus based on varying levels of
commitment, or—worst of all—unilateral sanctions. Unilateral U.S.
sanctions primarily penalize American companies and rarely achieve their
intended effect.
The notion of “targeted” sanctions has a dual meaning. In the first, practical
sense, it of course means levying a consequence on those responsible for the
offense covered by the sanctions—the assumption being that the designated
entities are clearly connected to what happened. In a more general sense,
though, sanctions should also be tied to a reasonable likelihood of exerting
influence, changing behavior, and fostering desirable outcomes (hence the
importance of establishing clear goals at the outset rather than retrofitting the
goals to sequential steps).
My purpose in writing this paper is not to analyze the specific entries on the
sanctioned list; instead, I assume that the SDN lists to date are reasonably
accurate. But for purposes of assessing effectiveness and informing policy
choices going forward, the cause-and-effect linkage between action and
reaction deserves further scrutiny.
While the sanctions implemented thus far will no doubt have more
demonstrable results in the longer run, U.S. official statements as to their
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effect to date have seemed to make convenient use of Russia’s alreadydeclining economic picture. It is true that Russian capital flight amounted to
some $50 billion in the first quarter of 2014—equivalent to the annual total
in 2013—but there are two important points to bear in mind. First, the
sanctions framework was announced on March 6, with additional financial
measures following in mid-March, which means the Q1 flight number was
likely 75-85% derived by this stage. More notably, capital flight subsequently
decreased in April (as sanctions intensified) and further slowed in May,
leading some economists to predict net inflows to Russia in June. These data
further support the second broader point, which is that Russian capital flight
was well underway in Q1 due to investors’ sense of heightened risk brought
about by Russia’s actions in Ukraine—not the U.S. policy response.
Similar points can be made with respect to ruble depreciation, as the Russian
currency’s value declined by more than 5% against the dollar earlier this year,
forcing the Central Bank of Russia to spend tens of billions in reserves
(including more than $10 billion in a single day) and to raise interest rates
twice, up to 7.5%. However, it is also the case that the ruble has risen by
roughly 3.5% since the sanctions were announced in early March.
And finally, U.S. officials frequently cite the decline in Russian stock markets
as evidence that the sanctions are having a direct impact on company shares.
With a few exceptions, however, the primary sanctions targets thus far have
been individuals and not companies, and most of these companies are not
publicly-traded. While the two indexes in the Moscow Exchange, the
MICEX and RTS, suffered steep declines in February as the crisis took hold,
the RTS has risen some 15% since the sanctions announcement, and the
MICEX rallied 10% in May alone, enjoying its best month in two-and-a-half
years. Russian stocks are now up 20% since mid-March, and in the last week
of May alone, investors poured $105 million in new money into the Russian
markets.
Thus, in terms of short-term economic impact, the cause-effect policy
linkages are tenuous, at best. Put simply, capital flight and currency pressures
are primarily a function of risk perception and a reaction to instability—
investors did and do flee temporarily. This is a cost to Russia, but one that
Russia imposed on itself.
Second, concerning coordinated action among allies, broad multilateral
support was difficult to achieve at the outset, though the U.S. administration
did an admirable job of cultivating and solidifying European support
(particularly British and German) in the face of initial opposition. Also, as
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concerns spread among American companies that Asian competitors might
stand to gain from the evolving sanctions policy, Japan subsequently signed
on to the effort, though in more limited form.
As a statement in principle, U.S. and European leaders reaffirmed the
possibility of further sanctions during G-7 discussions and D-Day
commemorative meetings in France in the first week of June. The trigger
most recently identified is a failure by Russia to cease support for ongoing
subversive activities on Ukrainian soil. While this is potentially a blurred “red
line,” subsequent developments have clarified that line for many in the U.S.
and some in Europe, leading to new sanctions in late July. Now the question
is the extent to which it will rally support for European shared sacrifice, such
that U.S. policy can avoid the quandary of unilateral sectoral sanctions.
Without European support, a further series of steps could include the
imposition of secondary sanctions on those European countries continuing
their economic relationships with Russia in ways that undermine the U.S.
effort (as was the case with the Iran-Libya Sanctions Act in the mid-1990s).
Some U.S. Senators have already proposed this in draft legislation.38
Given the substitution effect of Russian partners transferring their business
to Asian/European competitors, the cost to American business of a go-italone approach would be substantial in the near term and staggering over
decades to come, and not simply in terms of shareholder profits but also in
export-oriented jobs, just as the U.S. regains the jobs lost during the Great
Recession.
The stakes in the energy realm are rather obvious; even if the targets are
limited to state companies Gazprom and Rosneft, one need only analyze the
long-run significance of one project, the Exxon-Rosneft Arctic venture, to
advise against the tradeoff. Meanwhile, less attention is paid to potential costs
in other identified sectors such as financial services, one that is expected to
experience some of the most rapid growth and greatest market-opening
opportunity as a result of from Russia’s WTO accession. And the importance
of Russian corporate clients to London’s financial community has been a
principal concern influencing UK policymakers.
Beyond lost market share, another unintended consequences could be an
acceleration of Russia’s version of the “Asia pivot” in its foreign policy
Eli Lake, “NATO Plans New Military Outposts to Stop Putin—Just Don’t Call Them
Bases,” http://www.thedailybeast.com/articles/2014/09/03/nato-plans-new-militaryoutposts-to-stop-putin-just-don-t-call-them-bases.html.
38
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orientation. As noted above, Japanese firms acted quickly in March in seeking
to exploit opportunities presented by U.S. sanctions policy. And while the
groundbreaking $400 billion Russia-China gas deal was the result of
negotiations, it is also safe to say that it received new impetus as a strategic
priority this spring to solidify a 30-year hedge for Russian exports.
U.S. Policy Options
The crisis has now reached a point where pressure on the U.S. administration
to take further steps has reached a boiling point. This pressure is particularly
intense on Capitol Hill, and leading Democrats have joined the chorus of
Republican lawmakers urging the implementation of further sanctions to
inflict damage on the energy and financial services sectors of the Russian
economy, as well as the defense, engineering and mining sectors.
How bad could it get? There is no question that the U.S.-Russian relationship
has been seriously damaged, at least in the short run. The policy vectors now
being debated will influence where the relationship goes from here, but not
nearly as much as Russia’s policy choices will impact its relations with both
the United States and Europe.
There are three primary scenarios that could unfold in terms of next steps for
U.S. policy: a series of measures that stops short of sectoral sanctions (for
example, limiting access to international financial markets, stricter
enforcement of WTO and other trade rules affecting Russian exports, and a
more activist stance on anti-corruption measures); the implementation of the
sanctions on the five sectors outlined above;; and a “sanctions-plus” variant
that would employ sectoral sanctions as the departure point for a
multifaceted response.
Some might argue that the recent cease-fire obviates the need for further
U.S. sanctions, in that large-scale fighting has subsided and Russia and
Ukraine appear to have begun a process of dialogue. Thus far, however, U.S.
(and European) officials appear to take the contrary view, imposing
additional sanctions as a means to reinforce Ukraine’s negotiating leverage
and to press Moscow to discourage cease-fire violations by rebel forces.
The congressional pressure is evident in legislation introduced to cancel the
Pentagon’s current contract with Rosoboronexport (the arms trading unit of
the state-owned corporation Russian Technologies) for the purchase of 30
transport helicopters for the Afghan air force, valued at more than a halfbillion dollars. The draft “Russian Weapons Embargo Act” would also forbid
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any new contracts with Rosoboronexport and would prohibit cooperation
with any company, domestic or foreign, that conducts arms transactions with
Rosoboronexport.
This follows the pressure tactics pursued with respect to the Magnitsky List
for human rights violations in Russia. Congress stipulated that additional
names be appended to the original Magnitsky List of 18 persons by the end
of 2013. With bilateral tensions escalating through the winter, the
administration lengthened its review and then acted in May, following the
implementation of the initial sets of sanctions.
Sentiment in Congress is squarely behind sectoral sanctions and possibly a
sanctions-plus scenario. The push for sectoral sanctions evolved in two
important ways in mid-June: the support became bipartisan, with Senate
Foreign Relations Committee Chairman Robert Menendez (D-NJ) urging
President Obama in writing to act, preferably with European support, but
unilaterally if necessary.
The “sanctions-plus” faction is led by Senator Bob Corker (R-TN). An
influential group of Republican senators has introduced S. 2277, the “Russian
Aggression Prevention Act of 2014.” The bill calls for specific and severe
sectoral sanctions on prominent Russian banks and companies, as well as
direct military assistance to Ukraine in the form of anti-tank and anti-aircraft
missiles and small arms. It further requires the President to accelerate the
timetable for missile defense deployment in Europe and to increase U.S. and
NATO military support for Poland, Latvia, Lithuania, and Estonia. The bill
would also grant Ukraine, Moldova, and Georgia the status of non-NATO
ally, similar to that enjoyed by Israel, South Korea, and Japan, and a select
group of countries that frequently host U.S. bases. While technically outside
NATO’s formal security guarantee umbrella, providing this support would
fundamentally alter the geopolitical calculus on Russia’s periphery. In
addition to the political-military measures, the bill also requires increased U.S.
funding to support civil society and democratization promotion efforts inside
Russia, which would clearly pose an irritant to Russia in the wake of
increased scrutiny and control exerted by Russian authorities over NGO
activities and the expulsion of USAID from Russia a year-and-a-half ago.
While the bill as currently structured may be unlikely to pass as a package, it
is conceivable that key components could move forward or that variants of it
could be adopted if Russia continues to provide materiel support to the
separatists in eastern Ukraine. The Obama administration would face a
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difficult political dilemma if the Congress imposed measures harsher than its
own.
Energy Dynamics
The 2014 Russian Aggression Prevention Act also seeks to enhance Europe’s
energy security—and thus reduce Russia’s energy leverage—by providing
authority for the U.S. to export gas to Europe (and to WTO member
countries more specifically). The inclusion of this provision is but one
example of a growing transatlantic consensus that both policy changes and
infrastructure investments are necessary as part of a multi-pronged response
to change the energy dynamics in Europe.
The early June G-7 discussions demonstrated a new level of resolve to alter
the energy dynamics between Russia and Europe, such that initial steps in
2014 are virtually assured, irrespective of other short- and long-term
approaches to resolving the crisis in Ukraine. The G-7 leaders discussed a
U.S. plan to lift restrictions on the export of shale gas, while European
officials outlined support for building several LNG terminals in Europe and
substantial investments in reverse-flow technology from West to East. “The
diversification of sources and routes for fossil fuels is essential,” the G-7
communique stated. While longer-term solutions are finalized and
implemented, the leaders agreed to develop an emergency response plan for
the coming winter of 2014-15, the necessity of which became more apparent
when Russia halted gas supplies to Ukraine in mid-June.
The twin challenges of increasing supply and diversification of routes have
elicited a strengthened commitment to construct new pipelines to transport
supplies to Europe from sources other than Russia. The EU is pursuing
closer ties to Azerbaijan as it steps up its support for expanding the Southern
Gas Corridor for Azeri gas delivery through the Trans-Anatolian gas pipeline
through Turkey, as well as the Trans-Adriatic Pipeline running across Greece
and Albania to Italy. One interconnector will ship gas from Greece to
Bulgaria, and further interconnectors are under discussion.
The G-7 meeting in June confirmed support for building additional energy
infrastructure on an accelerated timetable, specifically regional and national
interconnectors and metering stations to facilitate “reverse flow” of gas
through existing pipelines. The reverse flow strategy began with small
shipments from Hungary to Ukraine a little over a year ago. By April 2014,
Germany began reverse-flow gas shipments to Ukraine via Poland, and at the
end of the month, Ukraine and Slovakia signed a deal for reverse-flow
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deliveries to begin this fall. Taken together, the two projects could eventually
supply one-third of Ukraine’s annual gas consumption. Since Slovakia has the
capacity to expand its reverse-flow commitment, the U.S. and EU will no
doubt try to persuade the Slovaks to do just that once the project is up and
running.
Senior EU officials have also highlighted the need to facilitate gas imports
from the U.S., in order to route some of the shale boom production for
LNG export. European Council President Herman Van Rompuy has
suggested the inclusion of this issue in the U.S.-EU Transatlantic Trade and
Investment Partnership (TTIP) negotiations. Though it would take several
years to implement given the infrastructure requirements on both sides of the
Atlantic, a bold step could be taken this year to amend the U.S. legal
framework with bipartisan support. The signal itself, years before the first
deliveries would reach the European market, would help facilitate a
revamped European energy policy and would alter the equation from the
Russian side. Of course, these projects will ultimately succeed only if they are
commercially attractive to U.S. and European companies.
Though the European energy dilemma primarily centers on natural gas
supplies, calls for action similar to lifting the ban on U.S. oil exports are
surfacing frequently, with the obvious endorsement of American energy
companies.
These measures to increase and diversify supply will likely be accompanied
by stricter interpretation and implementation of the EU’s Third Energy
Package and further constraints on Gazprom’s influence, especially as it
concerns the unbundling of ownership and transmission capacity.
Conclusion
U.S. and European leaders were quick to recognize that there can be no
military solution for the crisis in Ukraine. This made international isolation
and economic leverage the primary tools deployed to exert pressure on
Russia to change course after assessing the costs associated with its
destabilizing activity. Russia may have changed tactics, but it is not at all clear
that it has backed away from a strategy of promoting instability to influence
the shape and direction of post-Yanukovych Ukraine.
U.S.-Russia relations have been badly damaged by the crisis in Ukraine, and
the mutual grievances felt on both sides increase the probability of sharp
responses and further setbacks. Proposals in Congress and elsewhere
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demonstrate the potential for a downward spiral leading to talk of
“containment” or “Cold War Lite.” But the damage is not necessarily
irreparable. The international isolation of Russia will continue and intensify,
though the door to renewed engagement with Russia could reopen if Russia
takes concrete steps to deescalate the crisis and facilitates tangible,
sustainable progress toward a peaceful and unified Ukraine.
The current challenge for U.S. policymakers is to deploy the tactics of
international isolation and economic pressure without sacrificing long-term
business interests or encouraging, whether intentionally or not, a form of
commercial disengagement from Russia. Stepping back from large markets
that take years to penetrate carries with it tremendous costs—when market
share is ceded to competitors, it is difficult to regain, both in terms of access
to opportunities or of consumer brand loyalty.
Following the first round of asset freezes, Russian lawmakers quickly realized
that an upper house proposal to confiscate assets of U.S. and European firms
was short-sighted and ultimately harmful to Russia’s investment climate. If
the U.S. implements further sanctions, we can expect to see a concrete but
measured Russian response—for example, temporary bans on U.S.
participation in Russian government tenders. In view of the first two rounds
and the possibility of sectoral sanctions, President Putin has further
encouraged Russian energy firms to purchase Russian equipment and
services rather than entering into contracts with Western suppliers.
These are considerations for U.S. officials as they brief the investment
community on increased Russian risk or discuss with American companies
the extent of their participation in economic forums such as that held in St.
Petersburg in May. Both tactics pose a contrast to typical businessgovernment consultations in European capitals, and they further
demonstrate the challenge of a coordinated multilateral approach to limiting
collateral fallout.
Though there exist some ambiguities and differing interpretations in the
narrative of the past six months, it is clear that Russia’s role in the crisis
warranted a Western response. The nature of the response (and the Russian
response to the Western response) has put the U.S. business community in a
difficult position. Corporate executives understand the dilemma, but many of
them also recall previous sharp differences between the U.S. and Russia over
Kosovo and Georgia, among others. During moments of heightened political
tension, and especially during those episodes involving the use of force,
commercial interests on both sides point to the economic dimension of the
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bilateral relationship as a ballast when other ties are frayed. Corporations
obviously seek to preserve and advance their own interests in growing new
markets. However, from a strategic standpoint, more robust economic ties
and further integration of Russia into the global economy will quite likely
alter the context for adventurous pursuits, competition, and conflict in the
future.
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ABOUT THE AUTHORS
Thomas Graham
Thomas Graham is a managing director at Kissinger Associates, Inc., where
he focuses on Russian and Eurasian affairs. He was Special Assistant to the
President and Senior Director for Russia on the National Security Council
staff from 2004 to 2007 and Director for Russian Affairs on that staff from
2002 to 2004. From 2001 to 2002, he served as the Associate Director of the
Policy Planning Staff of the Department of State. From 1998 to 2001, Mr.
Graham was a senior associate in the Russia/Eurasia program at the
Carnegie Endowment for International Peace. From 1984 to1998, he was a
Foreign Service Officer and served twice in the U.S. Embassy in Moscow.
Fyodor Lukyanov
Fyodor Lukyanov is Editor-in-Chief of the journal Russia in Global Affairs,
published in Russian and in English, and Chairman of Presidium of the
Council on Foreign and Defense Policy, one of Russia’s most influential
foreign affairs membership organizations. His column appears regularly in
The Moscow Times, the Russian edition of Forbes magazine, Rossiyskaya gazeta,
Gazeta.ru and on the TV-channel Rossiya-24. A long-time journalist, he was
previously Deputy Editor-in-Chief and International Editor of Vremya
Novostei and International Editor of Vremya MN. Earlier, he as an editor at
International Radio Moscow (Voice of Russia) and a correspondent at the
newspaper Segodnya.
Blake Marshall
Blake Marshall is a leading specialist in U.S.-Russia economic relations based
in Washington, DC. His experience advising Western companies over the
past twenty years includes positions as Senior Vice President and Managing
Director of PBN Hill+Knowlton Strategies and Executive Vice President of
the U.S.-Russia Business Council. He has worked closely with a broad range
of American companies on their investments in Russia and other markets of
the former Soviet Union, with an emphasis on market entry and expansion,
business strategy, government relations, and stakeholder outreach.
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Paul J. Saunders
Paul J. Saunders is Executive Director of the Center for the National Interest
and Director of the Center’s U.S.-Russia Relations Program. As chief
operating officer of the Center, he is also a member of its Board of Directors
and Associate Publisher of The National Interest, the Center’s award-winning
magazine. He has closely observed U.S. policy toward Russia, and Russia’s
foreign policy and domestic politics, for over two decades. He served as a
State Department Senior Advisor during the George W. Bush administration,
from 2003 to 2005.
Igor Yurgens
Igor Yurgens is President of the Institute of Contemporary Development,
President of the All-Russian Insurance Association, and Vice President of the
Russian Union of Industrialists and Entrepreneurs, one of Russia’s largest
trade associations. In addition, he serves on a Russian presidential council on
human rights and as a professor at Moscow’s respected Higher School of
Economics. He is a leading authority on Russia’s economy and its
international economic relationships. He holds a doctorate in economics.
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ACKNOWLEDGEMENTS
I am deeply grateful to the four paper authors for their insightful and
sophisticated contributions to this volume. Ashley Frohwein’s thoughtful
and detail-oriented proofreading improved the product significantly, as did
Emma Hansen’s compelling cover design. Laura Bate’s careful preparation of
the final document was also essential.
Finally, I would like to thank Carnegie Corporation of New York for its
important and long-term support of the Center for the National Interest and
its work on Russia and the U.S.-Russia relationship.
71
1025 Connecticut Ave NW, Ste 1200
Washington, DC 20036
www.cftni.org