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Inside the News: Economic Sanctions Against Russia

Posted on Thursday, May 29, 2014

Months after the initial protests in Ukraine over now-deposed President Viktor Yanukovych's decision to side with Russia over the European Union, fighting continues in Ukraine's eastern provinces, where pro-Russian separatists prevented voting, the New York Times reported, as the country elected its new president, Petro Poroshenko.

With the U.S. and the E.U. imposing economic sanctions on Russia for its role in the events in Ukraine, Associate Professor of Economics Judith McKinnney helps make sense of the economic situation unfolding around the political strife. McKinney has done extensive research on the Russian economy, including her work during a Fulbright Scholar grant in 2012, studying the experiences of women who worked in the city of Yaroslavl in the late 1980s and early 1990s.

What, if any, are Russia's economic motivations for its support of the separatists in eastern Ukraine? How might Russia benefit from long-term economic influence in those eastern provinces, particularly if their independence is ratified?

I don't see this as motivated primarily -- or perhaps at all -- by Russia's economic interests. For the foreseeable future, in fact, the economic costs are almost certain to outweigh the benefits. The Ukrainian economy has not handled the transition from the Soviet system to a market system well; there has been little investment to modernize the industrial behemoths (coal mines, steel plants) inherited from the Soviet period; the government is saddled with debt (much of it owed to Russia for natural gas); and the global financial crisis hit the country hard. Average wages, salaries and pensions in eastern Ukraine are well below those in Russia. It is therefore hard to see how assuming economic responsibility for the area could help Russia. Furthermore, a strained relationship with the Ukrainian government increases the risks that Ukraine will disrupt the flow of gas from Russia to its customers in Europe, damaging a key source of Russian income. Ironically, while gaining the eastern provinces would be unlikely to help Russia economically, losing the area could hurt Ukraine since the eastern provinces -- unlike Crimea -- have throughout the 2000s enjoyed significantly higher per capita output and income than the western parts of the country.

Basically, though, I don't see this as an economic question. It seems to me that Russia's interests in eastern Ukraine stem largely from the determination to be a global power, to regain status lost after the dissolution of the Soviet Union, and to dissuade Ukraine from joining NATO. There is also the historical legacy: Russia's sense of historical identity begins with the ninth-century state of Kievan Rus' and this contributes to the Russian sense that Ukraine is not fully separate. 

To what extent have the economic sanctions imposed on Russia by the U.S. and the E.U. disrupted Russian trade and economic growth? 

Certainly there has been some short-term disruption to Russia's economy. Corruption and unclear and inadequately enforced property rights have always made investment in Russia risky and the sanctions have increased that risk. This has contributed to a decline in the Russian stock market and further encouraged capital flight from the country. In addition, the threatened loss of the European market for Russian energy appears to have led Russia to accept considerably less favorable terms in its just-signed energy agreement with China than it had long insisted upon.

However, if the goal of economic sanctions is to bring about a change in policy in the targeted country, experience suggests that they don't really work. Partly this is because the costs of the sanctions are generally borne by the population at large and sanctions tend to be used against precisely those countries whose leaders are not in danger of being removed by unhappy voters. In this instance, the U.S. administration has attempted to address this problem by very carefully focusing the sanctions on those in Putin's circle of close advisors, but it's hard to close off all possible avenues for protecting their assets. Furthermore, as the situation continues there will be pressure to broaden the sanctions and their impact will then become far more diffused.

A second weakness of sanctions as a way to alter policy is that they are never universally adopted, so the targeted country can always find alternative economic partners, the energy agreement with China being a clear example of this. Third, because trade is mutually beneficial exchange, denying the benefits to Russia simultaneously denies the benefits to those Western companies with which the trade would have occurred. Costs borne and opportunities lost by Western companies will lead to pressure for a relaxation of sanctions. Finally, given the long rivalry between the U.S. and Russia and Putin's determination to be seen as a strong world leader, I cannot imagine him doing anything that could be interpreted as giving in to U.S. demands.

Is there an upper-limit to economic sanctions -- a point at which the relationships among these countries (or their own economies) might be irreparably damaged?

Well, the upper limit to economic sanctions would be a total boycott and I don't see that happening. Even during the worst of the Cold War, when there were very strict limits on what could be sold to the Soviet Union due to fears that imported technology could be used for military purposes, the U.S. had trouble enforcing the restrictions for its own companies and even greater trouble maintaining the cooperation of our European allies. 

As for relationships among the countries -- it does seem as though there are plenty of people in government in both the U.S. and Russia who find it difficult to view the other country with anything but distrust. There's a certain comfort in having a familiar enemy.

 


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