Russia sanctions: Myths and lessons

Since they were first imposed in 2014, Western sanctions on Russia have provoked fierce debates. Major developments over the course of 2018 should settle many of them. 

Three things stand out. First, sanctions now directly target economic elites and major private assets, not only state officials and companies. {mosads}

Second, the United States is deploying some of the most potent weapons in its sanctions arsenal, notably financial measures hitherto used against terrorist groups, transnational crime and “rogue states.”

Third, sanctions have become an accepted, not exceptional, instrument for dealing with Russia. They have been employed to respond not only to aggression against Ukraine but to a “range of malign activity around the globe,” including subversion of Western democracies, cyber-hacking operations, military intervention in Syria and the Salisbury nerve agent attack. Most Russians accept that sanctions are here to stay.

The results reveal five important truths about Russian sanctions.

1. The Russian authorities are worried

Senior officials share growing alarm. Alexei Kudrin, a veteran Putin associate and key reform advocate, made repeated public warnings last year. He argued that Russia was now in a “stagnant pit,” that further sanctions would make Putin’s policy agenda “unattainable,” and that Russia’s main foreign policy goal should be to ease relations with the West.

Nikolai Patrushev, secretary of the Security Council and a leading silovik (security official), has very different views on most issues. But he, too, is worried. In August he told regional governors that Western sanctions were creating “serious problems” for the oil and gas sector due to Russia’s dependence on foreign capital and technology.

Reflecting these concerns, the Russian government adopted its first systematic strategy for combating sanctions. Putin raised sanctions at his end-of-year meeting with business leaders, who in turn were especially keen to discuss the international situation. A consensus has formed that sanctions are a major and growing problem.

2. Russian elites are worried 

Forty percent of business leaders say that sanctions have hurt their business. More significant is the uncertainty they have created for the wealthiest and best connected. America has demonstrated its extraordinary power through sanctions by largely cutting off several major business figures from the global financial system.{mossecondads}

The hardest hit, Oleg Deripaska, was forced to restructure the ownership and governance of his key asset, the world’s second biggest aluminium company, under a highly intrusive monitoring regime devised by the U.S. Treasury. With all major business leaders featuring on last January’s “Kremlin report” none can feel safe from future targeting.

Higher standards complement harsher sanctions. Russian elites now attract closer scrutiny in countries they have long used to keep their wealth safe. Even Roman Abramovich, the owner of Chelsea Football Club, has been affected.

There is more to do. But it is getting harder for all oligarchs, not only those under sanction, to use Western systems to protect their assets from the Russian state.

3. The Russian population is worried

In 2018, popular concerns about sanctions rose from 28 percent to 43 percent, according to the respected Levada Center. Seventy-nine percent of the population now want to see relations with the West normalized. The latest sanctions have neither rallied the population around the regime nor prevented the fall of Putin’s popularity to pre-Crimea levels. 

4. Sanctions are not pushing oligarchs into Putin’s arms

Contrary to predictions, oligarchs are not repatriating capital to Russia. On the contrary: outflows trebled in 2018, with a huge spike immediately after the April sanctions against oligarchs. Few Russians living abroad have heeded Putin’s renewed calls to return home. Despite official reassurances, some who have done so face criminal investigation on return — which will not encourage others to follow suit.

In harder times the Russian state is making new demands. Oligarchs have publicly criticized a presidential tax proposal as “an encouragement of inefficiency.” Nor have they welcomed Putin’s calls to invest $120 billion in new projects. Far from complying with new demands, oligarchs seek further relaxation of offshore regulations and other forms of sanctions protection.

5. Sanctions are not pushing Russia into China’s arms 

Sino-Russian relations have not deepened because of sanctions. Effusive words at frequent summits mask a thin reality. Sanctions have deterred China from completing a range of deals and from finalizing ruble-yuan swaps. This, together with the “innate hostility” of bureaucrats, makes Russia a high-risk market for China. Less than 1 percent of China’s foreign direct investment goes to Russia. Economics remain a weak link in their relationship.

Dispelling myths, learning lessons

This record dispels several myths: that Russia is not sweating sanctions, that sanctions make Putin stronger or more popular, and that they cement ties with China. 

We should not hear these again.

To demand that sanctions reverse the most severe actions quickly, as some do, is a false test. Sanctions rarely achieve this even against small states — and Russia is a uniquely hard target. Nor are other policy instruments judged this way.

The truth is, sanctions are working by raising the price the Russian government must pay for its behavior and imposing a strain on the country’s dysfunctional political economy. Business elites face rising pressures at home and abroad, and a mood of deep pessimism is spreading across the wider population.

These effects will grow, and new measures are likely to be added. Sanctions are helping to shape attitudes, interests and choices that will one day drive change in Russia.

Dr Nigel Gould-Davies is an Associate Fellow in the Russia and Eurasia Programme at Chatham House. He was previously the British Ambassador to Belarus (2007-2009) and Head of the Economic Department at the British Embassy in Moscow (2003-2007). Follow him on Twitter @Nigelgd1