Crimea: The cost of sanctions and the risk of retaliation

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The EU will decide in January 2017 whether or not to extend sanctions on Russia over the annexation of Crimea. [Sasha Maksymenko/Flickr]

Sanctions have already cost Russia one-third of its GDP. As they come up for renewal, the EU must be wary of backing Putin into a corner and forcing him to take drastic action, writes John Dale Grover.

John Dale Grover is a Non-Resident Young Leaders Fellow at the Center for the National Interest.

On 7 September, the European Union extended its sanctions blacklisting more than 100 Russian and Crimean officials. A few months from now, in January 2017, the EU will decide on whether or not to extend its economic sanctions against Russian organisations, including several defence companies. The officials and entities targeted by previous and ongoing sanctions were involved in the Russian annexation of Crimea in March 2014. The extension of the blacklist and the possible renewal of full EU sanctions raise the question of how long Putin is willing to accept continuous economic loss, and whether this policy will lead to any Russian attempts at escalation or de-escalation in eastern Ukraine.

Despite the initial success of Russia’s hybrid warfare, there are those in Russia — especially in Crimea — who now question the wisdom of continued fighting and its impact on their livelihoods. Crimeans have dealt with increased inflation in food prices and a collapse of tourism, a vital sector of the local economy that had been reliant on visitors from the rest of Ukraine.

The Russian people are not faring that well either. Between 2014 and 2015, Russia’s GDP dropped 34.71% from $2.031 trillion to $1.326tr. Russia’s unemployment has trended only slightly upward since January 2014 and has recently come down to 5.35% as of July 2016. This surprisingly low figure has led some to question the validity of Russia’s state statistics, while others have suggested that Russia has simply shed its excess foreign workers. Regardless of which is the case, Russia’s average household income remains at a low $500 a month.

On top of existing EU sanctions, Washington recently expanded its sanctions in August to include over 80 additional companies, including subsidiaries of gas companies, shipbuilders, and computer chip manufacturers. The military-economic consulting firm Janes Ships has reported that these sanctions are likely to wreak a fair degree of damage on Russia’s defence industry, as they will have less access to American investment and clients. Finally, these costs do not include those self-imposed by Russia’s retaliatory sanctions, such as a ban on importing EU foodstuffs, dating back to August 2014.

All of this adds up to a dangerous situation in which Russia has continued to suffer under the weight of sanctions, while Putin has found himself surrounded by a tighter and tighter circle of advisors. It is known that Putin had been lobbying to convince the EU not to extend its blacklist on individuals or any broader sanctions. He has a few months left, but he may well fail, as Germany’s Chancellor Angela Merkel has signalled that she would likely want to maintain them. Moscow has always attempted to downplay the impact of sanctions, but the damage to Russia’s economy and its ability to sustain the conflict continues.

The concern for Western policymakers is not just how much punishment is “enough”, but also whether imposing such punishment on Russia is worth the potential backlash. Should full sanctions be extended, the ball would return to Putin’s court. One option before him would be a carrot-based approach of offering to ease his sanctions or military presence in Ukraine or along the Baltic states. This may help Putin achieve some relief from sanctions, but he may also run the risk of appearing weak domestically, when the conflict was intended to stoke nationalism and garner support at home.

The other option would be to increase his use of the stick — something Putin is much better at doing. He could cut off gas to EU states as autumn and winter approach or escalate the situation in Ukraine. While costly, the latter option to bring about negotiations on sanctions would be less risky than cutting off gas to the EU. If the West refused to negotiate on a settlement and accept a phased reduction or end to sanctions, Putin could raise the spectre of another fait accompli in which Russia seizes more Ukrainian territory.

So while it is important to maintain sanctions to deter further aggression, especially against NATO territory, such sanctions must not back Putin into a corner, compelling him to take more drastic action. The US and EU should consider how to balance deterrence with the need to avoid further conflict, especially in the months leading up to the renewal date for sanctions. If mutual confidence-building and normalisation measures could be taken without removing all sanctions or appearing to excuse Russian actions in Ukraine, then they should be pursued.

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