The political row between Moscow and Washington drags on, as US sanctions continue to pound away at the Russian economy. The sanctions initially placed by the Trump administration on the Russian Federation—as well as several Russian businesses and oligarchs—have not been taken lightly by the Kremlin.
On 22 May, Russia’s State Duma (lower house of parliament) passed a “counter-sanctions law” against the US and other unfriendly states that have participated in restrictions imposed on the country. The law stipulates that the Russian president has the authority to prohibit business with American firms, provided they do not produce vital supplies or other basic commodities which have no counterparts produced in Russia or other “friendly” countries. Under the law’s framework, decisions on counter-sanctions may be made by the president based on proposals submitted by the Russian Security Council.
Russian media claimed that a number of US firms have approached Russian leaders requesting that changes be made to the law that would allow them to maintain their operations in the country. Foreign Ministry official Georgy Borisenko reportedly told parliament in a recent address that “In the United States, the reaction comes from business circles as a great number of major US companies have been actively working on the Russian market since the Soviet Union time and would like to stay here.” The truth of this “appeal” by the US business world has not been confirmed. Even if partially true, it would underscore how Russia can bite back in a way that would actually impact American companies.
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How Did We Get Here?
Months ago, the Trump administration began slapping federal sanctions on entities in Russia. Instead of only targeting business based on Russian nationality, however, the US pinpointed individual Russian citizens and all their business operations. In early April, a series of Russian oligarchs and affiliated companies were hit by the Treasury Department. The Department’s Office of Foreign Assets Control (OFAC), in consultation with the Department of State, announced that seven Russian oligarchs and 12 companies they own or control had been designated. An additional seventeen Russian government officials affiliated with those businesses were also included on the blacklist. The move by OFAC meant that those individuals listed will have their assets frozen, and all United States citizens will be generally prohibited from engaging in business with them. Treasury Secretary Steven T. Mnuchin summed up the rationale of these measures in a statement:
“The Russian government operates for the disproportionate benefit of oligarchs and government elites. The Russian government engages in a range of malign activity around the globe, including continuing to occupy Crimea and instigate violence in eastern Ukraine, supplying the Assad regime with material and weaponry as they bomb their own civilians, attempting to subvert Western democracies, and malicious cyber activities. Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government’s destabilizing activities.”
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Initially, the sanctions seemed to have a devastating effect. On 9 April, media reported the biggest fall for the Russian rouble in more than three years. The main Russian stock index slumped and investors began dumping shares in businesses controlled by the individuals that had been recently designated by OFAC. One Russian firm, the aluminum hydropower company EN+, controlled by oligarch Oleg Deripaska, dove 25 percent in value. If these trends continue, these and any future sanctions will become difficult for the Russian government to ignore.
Russia Rides Out the Storm
But despite the early signs of a damaged Russia, the consensus view among analysts seems to be that the tightening of US sanctions, and the fall in the rouble in early April, have had little impact on the real economy so far.
With Russian GDP growth nearing two percent, and the working-age population shrinking at one percent per year (meaning the growth is actually closer to three percent per person), that puts the nation’s economy in a pretty good state. Indeed, fluctuations in GDP by a few percentage points here or there isn’t necessarily the best way to judge the Russian economy’s health. From the perspective of the Russian people, the market is doing just fine. This is because the incredible population decline in the country has lead to a lower labor supply in the workforce, resulting in low unemployment. There are few discontented young people. All of these signs on the ground are confirmations of optimistic voices amongst economists, predicting steady growth of the Russian market despite the burden of sanctions.
An additional boost to Russia’s national revenue came from an unexpected place recently: United States foreign policy.
When President Trump nixed the Iranian nuclear deal in May, he vowed to reimpose some of “the strongest sanctions that we’ve ever put on a country.” Among the biggest targets were, of course, Iran’s booming oil fields. Iran’s crude oil industry is a virtual economic engine that fuels Europe and Asia with 4 million barrels a day.
May 22, 2018: British Petroleum Defers to US Sanctions, Drops Project Involving Iran. (Credit: Facebook/The Jewish Press)
And this is where supply and demand will kick in, very likely in Russia’s favor.
The new sanctions will likely remove a million barrels of Iranian oil a day from world markets once the restrictions fully kick in over the coming months. No one is in a better position to reap the benefits of the price surge than the Kremlin. Russia is one of the world’s biggest energy exporters. For the past four years, sagging oil prices have severely hurt the energy sector, the country’s single biggest source of currency. Now that Trump’s Iran sanctions will likely make a huge dent in the oil supply, Russia’s luck could be reversed.
The Road Ahead
While the short-term effects of the Russian sanctions are unclear, there are still some very serious elements Russia will have to contend with. First off are the new obstacles that Russia will have to traverse if it wants to operate within the international sphere. From this perspective, the objective of sanctions is not to cripple the Russian economy, it is to send a signal by limiting Russia’s room for maneuver. Putin would like to project to the world a sense of disconnected independence, that Russia does not need the world to survive economically. In March, as the Russian president took his fourth oath of office in the gilded St. George Hall of the Grand Kremlin Palace, he promised the assembled audience that Russians would create their “own agenda for development so that no obstacles and circumstances interfere, as we and only we determine our own future.” But already, US sanctions have shown to be a factor in Russian government dealings. The major defense deals between New Delhi and Moscow have been threatened by these restrictions. And while India seems determined to find a way around them, it is doubtful Russia will get this lucky every time.
(Credit: Facebook/Global Counter Terrorism Council)
Additionally, one of the most detrimental elements of the sanctions is not likely to manifest in the short term. The fact that Russia is being targeted so heavily by the US and others serves as a deterrent to foreign investment. Western companies, in particular, are becoming increasingly scared of having anything to do with Russia. The effects of this phenomenon do not show up very quickly on a bank balance or a ledger. Investors are nervous about betting on a horse the Treasury Department designates as a threat to world peace. The first step is selling the stocks. The second is holding back investment capital.
And finally, there may be a factor Russian legislators overlooked when instituting the counter-sanction bill last week. Part of the new law was criminalizing any attempt to comply with US sanctions. This, according to some of Russia’s financial sector leaders, could severely backfire by forcing international firms to pull out of Russia. Sanctions are never good for business in any way. But if a company is going to be forced to choose between Russia and the United States, it will almost certainly pick the latter.
