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  Sanctions to Russia: who will laugh best? (1)

Viktor Denisenko
2014 06 23

Russia‘s role and influence with respect to the events in Ukraine urged the West to impose sanctions against Russia. Moscow laughed off the first signs of sanctions and their scope, but today nobody knows who will laugh best.

In response to Russia‘s aggression against Ukraine, the West has chosen „soft“ economic sanctions (imposed by the United States, the EU, Canada and Switzerland). Since the moment of introduction, sanctions have been tightened up several times. If Russia doesn’t stop its actions against Ukraine, the scope of sanctions might become even broader. 

The U.S. sanctions are imposed to 42 persons and 18 companies; the EU’s  sanctions are directed against 49 persons and 2 companies; Switzerland imposes sanctions to 61 persons.  In the lists of the U.S. and the EU one can find the names of high Russian officials, including the Chairman of the Federation Council V.Matvienko, Chairman of Duma S.Naryshkin, Vice Chairman D.Kozak and D.Rogozin, Head of President‘s Administration S.Ivanov, advisors to President V.Surkov, A.Fursenka and S.Glazyev. Yet, the above lists do not include the two key names: Russian President V.Putin and Prime Minister D.Medvedev.

No one from the list has shown any public concern with respect to sanctions, yet they could be a good measure of influence – we know how Russian political and business elite loves Western comfort, although in the official discourse hostility toward „soulless“ Western world is demonstrated frequently. Finally, many Russian entrepreneurs’ children and children of the Kremlin’s officials study and live in the „despised“ West. Sanctions attracted the world’s attention to Russia‘s actions in Ukraine, but the fact that Russia has tarnished its image in the eyes of Western world is even a more powerful measure. Dealing with Russia has become a bad manner, and investments to Russia are referred to as a very risky game. The loss because of the „image“ might become a huge problem for Russia.

Not only foreign companies have frozen their assets in Russia, but also some local enterprises. Game Insight, one of the largest Russian developers of games for mobile devices, announced that it was moving its headquarters from Moscow to Vilnius. The founder of the company Alisa Chyumachenko had to make this decision: Vilnius is a more convenient place to communicate with the international partners. Besides, the company’s relations with Russia have started interrupting the normal conduct of business.

Official Russia‘s authorities have also started speaking about the preparation for tough economic times ahead. Finance Minister A.Siluanov predicted that economic crisis might last several years; sanctions are also harmful to economy for they might cause international lending problems. Moreover, investors are running from Russia, and the assessments of the ratings agencies are not promising for the country. 

It is already obvious that this year Russia will not reach the forecasted economic growth, the next year will be even more problematic. According to the latest forecasts, this year Russia‘s GDP should increase by 1.1 percent, but this is an optimistic scenario. The pessimistic scenario reveals economic growth this year at just 0.5 percent and even less. In view of this, and according to Deputy Economy Minister A.Klepach, nobody can guarantee stable pensions, state budget funds and state investment.

One of the major problems preventing from Russia‘s economic growth is capital withdrawal. Pursuant to forecasts the capital amounting to about 25 billion US$ has gone out from Russia (according to recent forecasts, from 60 to 100 billion US$).

In order to improve situation, Russia tries to redirect its economy toward China, but this tactics is also highly doubtful. It is highlighted that China will make use of these Russia‘s actions as far as it finds them beneficial for Beijing. But China will hardly play the role of a saviour of Russia’s economy.

Economic problems should make Russia reconsider its actions. Hardly will the Kremlin be able to resist the dangerous games in Ukraine, yet the measures applied should be softer than before. Though slowly, Russia has removed the troops from the border with Ukraine. Moscow also avoids to officially support the so called Donetsk People‘s Republic and Lugansk People‘s Republic. Of course, Moscow will try to play a more subtle game but it will try to retain tension in Eastern Ukraine as a measure to achieve geopolitical aims.

I dare say that the war with Georgia in summer 2008, occupation of Crimea and destabilization of situation in Eastern Ukraine was nothing but Russia’s attempts to check its power limits in the then geopolitical situation. It seems that in case of Ukraine Russia has already crossed the „red line“. Response of the U.S. and the EU could hardly be referred to as an immediate, but certain effect has been achieved. In any case, today Moscow shouldn’t dream of complete impunity. Economic sanctions have demonstrated that.

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