In the aftermath of the recent MH17 crash, it is all but certain that international pressure on Russia will be ramped up. Here are four ways it might happen.
The crash of Malaysia Airlines Flight 17 more than a week ago in a field deep in rebel-held eastern Ukraine has sparked a diplomatic standoff. By this point, almost all parties agree that the Boeing 777, en route to Kuala Lumpur from Amsterdam, was shot down, killing all 298 people on board. And despite attempts to shift the blame in Moscow and Donetsk, most observers agree that mounting evidence shows Russia was squarely behind the fatal missile strike.
As OSCE monitors and Dutch forensics experts race to document the grisly remnants of the crash, Western diplomats are pledging renewed pressure on Moscow after several rounds of previous sanctions enacted in the wake of Russia’s annexation of Crimea.
Existing sanctions
Dubbed “Phase 1” and “Phase 2”, EU and US punitive measures against Ukrainian and Russian entities, respectively, left much to be desired in terms of coordination. The Europeans may have begun first, on March 15, but they have limited their application of travel bans and asset freezes to individuals directly linked to the corruption and violence in Crimea and Ukraine, such as Russian and former Ukrainian security officials seen as close to the separatists.
Although there is some overlap between Brussels’ and Washington’s list, the latter is far more ambitious in both scope and geography. Instead of solely focusing on the mentioned individuals, the US has also gone after prominent businesspeople and companies. In addition, it has not been afraid to target members of Russian President Vladimir Putin’s inner circle, such as influential billionaires Gennady Timchenko and Arkady Rotenberg.
This is anything but surprising. EU foreign policy requires unanimous consent from 28 member states with often divergent interests. Italian and German companies have particularly close trade ties with Moscow. Russia supplies Europe with one-third of its natural gas needs. And Russia is home to sizable investments from some of Europe’s biggest oil and gas powerhouses – Royal Dutch Shell has large stakes in fields in Siberia and off Sakhalin Island, and BP even owns 20 percent of Russian giant Rosneft, the world’s largest oil company.
The American private sector is not immune either. For instance, Russia accounts for 6 percent of Exxon Mobil’s global production and is home to both Ford and GM assembly plants. Yet, that has not stopped Washington. Lost in the news of the MH17 crash was the latest round of US sanctions put in place a day earlier, which are undoubtedly the strongest yet, and which immediately caused Russian equities and the rouble to tumble.
Four of Russia’s largest companies are now barred from US capital markets for transactions lasting longer than 90 days: Novatek, Gazprombank, Vnesheconombank, and Rosneft. The latter’s chief executive, Igor Sechin, often-described as the second most powerful person in Russia, was already honed in on by a previous US Department of Treasury order. Eight weapons manufacturers and four Russian and Ukrainian separatist high-ups were additionally added to the ever-growing sanctions list.
A previous European round of economic retribution has been much more modest, even if it did finally agree on the concept of blacklisting certain Russian private sector entities. But there now seems to be little doubt that both Washington and Brussels will expand their sanctions on Russia in the weeks to come. Here are some possibilities.
1. Bigger list of Russian individuals and companies targeted
This is by far the simplest option, as well as the most politically palatable for Europe. Instead of seriously raising the stakes, Western powers can simply continue with the current set of so-called “targeted” measures by increasing the number of Russian individuals and businesses subject to travel bans, asset freezes, and blacklists. In fact, just a few days ago the EU expanded its own sanctions list to include additional Ukrainian separatist and Russian security officials, among other entities.
Possible candidates might even include well-known jet-setting oligarchs who are known to support Putin, such as Premier League club owners and shareholders Roman Abramovich and Alisher Usmanov. Perhaps more damaging would be to place additional Russian banks under Western sanctions. When Bank Rossiya and other banks had their US assets frozen and US entities were prohibited from transactions, Visa and Mastercard stopped providing services for them, and millions of their clients suffered.
2. Target one economic sector
The first step to a “Phase 3” sanctions regime would most likely involve targeting an entire Russian economic sector, a step which thus far all parties have loathed to do. The goal is not necessarily to cripple Moscow, but rather to prove that the West can cripple Moscow if it so chooses. Hence, one can anticipate a less-critical part of the $2 trillion Russian economy zeroed in on, such as its mining or aviation industries.
Asset freezes on all individuals and companies associated with the chosen sector would be a given. However, do not be surprised if the West ups the ante by totally restricting these companies from US and European capital markets. This could include prohibitions on short-term debt issuance and derivatives too, and might even punish Western entities that trade in their shares or receive dividends from the affected companies.
3. Target multiple economic sectors
As if barring an entire sector from borrowing in dollars and euros and preventing it from interacting with Western investors is not enough, the punishment could extend to multiple sectors. The financial services sector could be a prime target. London is known a financial center for Russian firms and their $650 billion of foreign debt. It could be closed to them, although doing so would not be painless for Western financial institutions.
What would this mean? In terms of financial services, a whole lot. Russian financial institutions would be excluded from such essential tasks as raising Western debt or equity, purchasing insurance from Western firms, clearing dollar or euro transactions, listing their shares on Western exchanges, and using the services of a Western broker.
The net result would be that Russia, outside of its $430 billion foreign-exchange reserves, would find it near-impossible to procure dollars or euros, there would be clear knock-on effects across its economy (as available domestic finance would shrink), and it would suffer massive capital flight.
4. “The Iran option”
This option, however unlikely, would take a leaf out of the Iran sanctions book, which essentially reads: target everything. A few humanitarian exceptions aside, this would ban all trade, investment, and financial dealings (including the clearing/settlement of transactions) between the participating states and Russia, not to mention any and all rouble transactions. Further penalties might even be implemented on institutions who deal with offenders.
Included prohibitions would range from the trivial (no importation of gifts of over $100 from Russia) to the vital (including Russia’s central bank on the sanctions list, which would eliminate any last lifeline Moscow has to sell its exports to the affected countries, short of clandestine transshipment or barter).
By this point, diplomatic snubs would be employed as well: suspension from the G20, attempts at isolation within other international bodies, and a loss of diplomatic recognition. Like in Iran’s case, the effects would be utterly devastating.
Why the US and Europe will diverge
Fortunately for Moscow, Europe’s recovery is sluggish and its winters cold. Most European economies cannot afford to risk a trade war with one of their biggest trading partners that could plunge them back into recession. French intransigence in the face of calls for it to suspend a $1.6 billion defense contract with Russia speaks volumes.
Energy politics also means Europe cannot afford to put in jeopardy its foreign gas supplies. Some EU members, like the UK, import virtually no gas from Russia. Others are totally dependent. What is more, construction of a new, southern gas pipeline – South Stream – from the Black Sea to central Europe threatens to make the continent even more reliant on Moscow. One by one, EU states along its route, from Austria to Hungary to Bulgaria, have overruled Brussels’ objections and have proceeded with the massive energy project.
This will undoubtedly come at the price of moving forward with a harmonized transatlantic sanctions project. Expect the EU to embrace Option 1. Expect the US and a select few non-European allies to be shouldered with the responsibilities of the rest.
