These correspond to first (individuals) and second (banks/corporates) stage sanctions and this time around there was also a sniff of the third stage “sectoral” sanctions with restrictions placed on the export of high tech defense goods; albeit the assumption in any event was that these were limited anyway.
For the latest round of sanctioned individuals see:
http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20140428.aspx
The list of sanctioned individuals is again fairly significant, capturing yet more of the Kremlin’s elite, those nearest and dearest to President Vladimir Putin.
Perhaps of most significance, this time around Igor Sechin, the CEO of the significantly state owned oil company, Rosneft, was included, plus his deputy. Sechin hails from the security (siloviki)/energy lobby around Putin – and follows the sanctioning of Sergei Ivanov, last time around. Also included was Dmitry Kozak, another Vladimir Putin apostle (Putinista) who currently serves as deputy prime minister, and who has remained close to the incumbent president for much of his time in power, and was “trusted” as point person for the regime for the delivery of the Sochi Winter Olympics.
Reviewing the list of banks/corporates sanctioned what is striking is the relative absence of any banks/corporates at the “commanding” heights of the Russian economy – there had been an earlier hint from US government officials quoted in the media that some Russian state owned banks might have been sanctioned.
Of the banks named, all appear to be small, “pocket” banks, and amongst the corporates there appears to be a plethora of construction companies. In recent days the US press has been awash with articles that the US administration is eager to expose the illicit wealth of the Kremlin elite, and the inclusion of construction companies and some small banks is likely to be aimed to further pointing the way for investigative journalists, plus also a warning to regime members that the US government knows where regime members have their personal and less than opaque investments, and is maybe more than willing to reveal more details, which could perhaps begin to weigh on their domestic popularity.
Connections thru/to Rosneft might have been included as the US government is perhaps nervous over potential back-draft from retaliatory sanctions, and therein the potential impact on its allies in Europe which are more dependent on Russian energy. Perhaps it considers Europe to be less dependent on oil deliveries from Russia, than say gas supplies, hence the reluctance thus far to include gas-related entities on the sanctions list.
Note that in general I would play down the risks of Russia retaliating through the energy channel and to Europe – if anything in recent weeks Moscow has been eager to assure that deliveries of energy to Europe are stable and on track.
Therein the point is that Russia would be the big long-term loser if it followed through with retaliatory sanctions in the energy sector, further encouraging diversification in Europe away from Russia, at a time when competition in the sector is increasing.
It would also probably be mindful that in previous energy supply spats with Ukraine, where energy supplies were disrupted, typically those countries in Europe most badly impacted were those in southern Europe and with historically closer ties to Moscow, e.g. Italy, Greece, Bulgaria and Serbia. Thus by moving to impose retaliatory sanctions in the energy sector, Moscow would risk eroding support from allies in Europe, and rallying Europe to Ukraine’s cause in the process. Moscow is hence eager above all not to kill the golden goose in the energy sector, and while wanting to improve energy supplies to China and Asia, it does not want to become overly dependent on this market – it wants/needs a diversified export market structure.
This idea that the US government is going overboard to calibrate the sanctions, thinking thru potential impact on different sectors/players in Russia and also Western business interests is clear from what was revealed today.
Perhaps a generous interpretation of this third sanctions iteration is that these are uber-stealth/intelligent sanctions, trying to target Putin’s inner circle and their personal wealth, rather than the Russian economy, per se, or the Russian people. The US government therein might be nervous of giving the Putin regime an opportunity to further muster domestic popular support, if the sanctions actually cost locals jobs, and bite hard domestically. Rather these are subtle, trying to signal that the regime’s personal riches are vulnerable to exposure.
The danger of the above is that the subtlety is lost on those in power in Russia, as they feel secure enough in their popularity at home, control of media sources and their ability to “spin” the message, plus they perhaps have various and huge other alternative sources of private wealth/assets, beyond the grasp of the West in other less opaque/accessible jurisdictions.
The initial market reaction has been negative – Russian markets have rallied, as the assumption is that these sanctions have been weaker than expected, with less real impact on the Russian economy. The sense is that the US and West is simply unable/unwilling to roll out a significant sanctions package, to make any meaningful impact on the Vladimir Putin regime, or at least to desist from continuing to adopt a destructive approach towards Ukraine.
The above does begin to raise the question as to whether sanctions can work with respect to the current crisis in Ukraine – can they change Russian policy towards Ukraine?
I would tend to argue towards the affirmative, but only if the Putin administration really thinks the West is serious, and sanctions will be significant. Do they care about stealth/pa sanctions or would they be more nervous should the US/West actually target more wholeheartedly the broader Russian economy.
I am thus in the camp of thinking that sanctions have already had some effect, by already encouraging Russia to hold back from a much more direct intervention (full blown military invasion) in Ukraine – my sense is that Moscow was initially surprised that the West even went down the sanctions route, soon-after Russian troops (‘little green men’) appeared in Crimea, and just before the annexation of Crimea – it expected no Western response to events in Crimea or a broader military incursion into southeastern Ukraine. Indeed, after annexing Crimea, Moscow seems to have trod water to better understand the likely Western response via the economic/financial sanctions route. This is not to say that Russia is still not mindful to seek a more direct military solution in Ukraine – but this still makes it that much more important for the US/West to correctly calibrate/signal that the economic/financial losses which would result to Russia and its elites in particular, would be very significant. The question now is does the latest iteration of sanctions send the right kind of message to Russia’s leader(s).
It might also be argued that economic/sector sanctions on Russia would in any event be slower to impact, given the still substantial buffers which Russia has (e.g. $480 billion in foreign exchange reserves) and that stealth/pa sanctions could well have the best chance of making most short term impact on the regime – rather as they did with the Victor Yanukovych regime in Ukraine in February – I think the rolling out of elite sanctions on the former regime in Ukraine was one of the key factors which finally brought the demise/flight into exile of that regime.
Timothy Ash is head of emerging market research at Standard Bank plc based in London.
