New EU and US sanctions against vital sectors of Russia’s economy is the most comprehensive Western answer to Russia’s continuous support for separatists in Eastern Ukraine. With the Ukrainian army gaining a strategic military advantage, Russia is facing some hard choices.
On July 29, the US administration and EU leaders agreed to increase the efforts to punish Russia over its involvement in the Ukrainian crisis and the events surrounding the downing of the Malaysian Airlines aircraft on July 17. The sanctions regime primarily targets Russia’s energy, banking and defence sectors — key areas where Russia depends on the West the most. The goal is also to punish President Putin’s closest circle of collaborators who have close financial ties with the West.
The move will inevitably harm the country’s economy by starving its financial sector and preventing fresh capital injections and sophisticated Western technology that is needed for complex oil explorations in Russia’s Far East and in the Arctic. Another important feature of the sanctions regime is the apparent lack of restrictions against Russia’s gas sector, which is undoubtedly linked to Europe’s dependence on Russian gas.
In addition to making European and US companies reluctant to forge new deals in Russia, the sanctions will also have an impact on many sectors of the EU economy. The European oil giants have already started to sever ties with their Russian counterparts. The French owned Total has stopped increasing ownership stakes in its Russian partner Novatek, and BP has warned of potential losses related to its Russian operations and partnership with the sanctions-affected Rosneft.
The European industrial sector remains the key opponent to stricter sanctions, and with a good reason since EU businesses will be particularly affected by the weakening of the Russian economy. Both Renault and Volkswagen have already announced weaker results from their Russian operations as a direct result of the sanctions, as have Adidas and Siemens.
However, the key question arising from this situation is whether the sanctions will achieve their main goal: to force Russia and President Putin to stop meddling in Ukraine’s internal matters. So far, Russian leadership is defiant and determined to continue on its current course. Moreover, the latest information signifies that Russia continues to pour weapons across the border into Ukraine. According to the Ukrainian News Agency, seven tanks entered Ukraine from Russia on July 3o.
On the other hand, Ukraine’s recent military successes could end the conflict sooner than anyone expects. The Ukrainian army offensive has so far pushed the pro-Russian separatists outside of the many previously occupied parts of Eastern Ukraine, and restricted their control to the two remaining strongholds — the cities of Luhansk and Donetsk. Hence, at the moment, the military situation does not look promising for the future of the self-proclaimed Donetsk People’s Republic.
Direct military intervention would turn the military tide in Russia’s favour, but at the same time it would undoubtedly throw the country into even deeper international isolation. Nonetheless, the Russian population has over the past months been so intensely bombarded with negative official propaganda surrounding the situation in Ukraine that it would be hard for President Putin to explain to his countrymen why he let his Ukrainian protégés down, after Russia sacrificed so much of its international reputation and risked its economic future to support another semi-independent entity on its borders. At the moment, 83% or Russians approve of President Putin’s leadership.
A lot will probably depend on the internal dynamics of the Kremlin inner circle — namely, the Russian oligarchs targeted by Western sanctions. With their financial losses mounting as a direct result of restricted access to the Western financial markets, it is likely that support for the military adventure in Ukraine will weaken among many of Putin’s closest collaborators. After all, one of the goals of the sanctions is to break the cohesion within the Russian leadership, which is to a great extent based on the interwoven web of financial interests and links to the Western financial systems.
This presents hard choices for Kremlin, but also a window of opportunity. At the moment, it seems that nothing short of direct military intervention can help the insurgents to achieve their goals, and this is something that Russia cannot afford to do. President Putin is probably painfully aware of this fact, and despite the humiliation that the defeat in Eastern Ukraine might pose for his self-esteem, such a scenario could actually give him a fresh opportunity to rebuild Russia’s relations with the West.
Regardless of the final outcome, many issues will remain unresolved — primarily the position of Crimea, which Russia unilaterally annexed in March and which is likely to remain a thorny international issue for many years to come. It also remains unclear how the West will formulate its policy towards Russia once the Ukrainian crisis is over, and what stance Russia will take in the future with regards to both Ukraine and its global role.
It seems that the only aspect of the Ukrainian situation upon which both the Western leaders and their Russian counterparts can find similar language is the strong denial of any link with the Cold War. Recent events, however, tell a different story.
