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Mar 6, 2014 | 12:59 GMT

U.S. Options Are Limited for Sanctions on Russia

U.S. Options Are Limited for Sanctions on Russia
(DIMITAR DILKOFF/AFP/Getty Images)
Summary

As the standoff between Russia and the West continues over Ukraine, the United States is considering enacting trade sanctions against Russia. However, there is little Washington can sanction that would affect Moscow significantly unless the White House takes the drastic and unlikely step of banning U.S. firms from working with or in Russia.

Any sanctions regime would require Europe's participation if it is to pose a meaningful threat to Russia, and enacting real trade sanctions against Moscow would hurt many Europeans as well. Washington will probably have to act on its own if it moves forward with sanctions. 

The U.S. House Committee on Foreign Affairs will draw up a non-binding resolution on March 6 to encourage sanctions against Russia. This comes after U.S. Secretary of State John Kerry said March 2 that G-8 nations and some other countries are "prepared to go to the hilt to isolate Russia." 
 
Steps taken in the U.S. House of Representatives are the first toward setting up real economic sanctions against Russia. Kerry has mentioned specific possible measures: Washington could place sanctions on trade, ban visas for politicians, freeze Russian assets in the United States, push to suspend Russia's membership in the G-8 and isolate Russian trade. The suspension of Russia's membership in the G-8 and other clubs would be mostly symbolic and not affect Russia in any meaningful way. The same holds true for banning visas for Russian politicians traveling to the United States.
 
The question is what sanctions Washington can impose that would actually harm Russia. Approximately 2 percent of the volume of Russia's exports goes to the United States. In 2013, $19.3 billion worth of petroleum products and $1 billion worth of nuclear fuel accounted for most of these exports, and the United States can procure those commodities elsewhere. For such a large country, Russia does not import much, since it has extremely protectionist policies on imports. Approximately 4.9 percent of imports to Russia come from the United States, with top exports including civilian aircraft, passenger cars, chemicals and meat and other agricultural products — all of which Russia could source elsewhere. Thus, Russia accounts for less than 1 percent of U.S. trade volume, and the United States accounts for less than 4 percent of Russian trade volume.
 
Countries Exporting To Russia

Countries Exporting To Russia

Russian Export Destinations

Russian Export Destinations

 
In addition, Russian banks and financial institutions currently have little exposure to the United States. As of the end of 2013, Russians had deposited $20.2 billion in U.S. banks — a fraction of the $750 billion in deposits in Russian banks.
 
The United States holds approximately $56 billion of Russian-issued stocks — 6 percent of Russia's $870 billion market capitalization. Selling these stocks would not crash the Russian markets, though some minor instability might result. Such a move would, however, harm the U.S. firms that hold the stocks. Russian companies (especially state-owned firms) that list on foreign stock exchanges tend to avoid the United States; most Russian firms are listed on the London Stock Exchange, and some are listed on the Frankfurt exchange.
 
Russia is concerned about the health of the Russian ruble, which has slumped during the crisis in Ukraine. The United States and most European countries do not hold currency reserves in rubles, so any attempt to harm the Russian currency would have to be done indirectly — perhaps by soliciting the help of private firms that hold Russian bonds and stocks.

What Can the United States Do?

Sanctions on trade would likely cause little harm to Russia, as would freezing Russian assets, but there is one move that would have dramatic effects: Forbidding U.S. firms from cooperating with or operating in Russia. This would ripple across many sectors in Russia, but the most critical would be energy and defense.
 
If Washington banned U.S. firms from operating in Russia, it would anger the U.S. firms working in Russia's massive energy sector. After nearly a decade of Kremlin protectionist policies in the sector, Russia in the past few years has opened up more to foreign energy firms. The United Kingdom's BP and France's Total have increased their investments in Russia, with BP now holding a nearly 20 percent stake in Russian state oil behemoth Rosneft and Total working with Russia's Novatek on the Yamal Peninsula.
 
As for U.S. firms, ExxonMobil has by far the largest presence in Russia after signing a string of agreements in 2012 worth tens of billions of dollars. ExxonMobil and Rosneft are jointly exploring the Kara Sea and Black Sea, an effort worth $3.2 billion, and are building a $15 billion liquefied natural gas facility at Vladivostok. Rosneft also has agreements with ExxonMobil in North America, including a 30 percent acquisition of projects in West Texas, a 30 percent stake in 20 blocks in the Gulf of Mexico and a 30 percent stake in Harmattan, in the West Canada Basin. These projects will enable Rosneft to develop technologies that it could then use in unconventional and hard-to-develop energy reservoirs in Russia. Energy firms in Russia rely on Western technology to maintain production levels, especially as Russian energy production is starting to come from more difficult fields.
 
Blocking the involvement of U.S. energy firms would seriously affect the Russian energy sector, but it would also strike a blow to the U.S. firms, which have spent billions of dollars in Russia. ExxonMobil's exploration fields in Russia are its largest non-American assets. Additionally, Russia's energy customers — particularly the Europeans — would oppose any sanction that could harm their future energy supplies.
 
Russia's military industry would also be affected if U.S. firms ceased collaborating. From 2006 to 2010, the United States sanctioned Russia's military industrial firm, Rosoboronexport, for violating nonproliferation measures in Iran and Syria. The ban did little to affect the Russian firm, which was not relying on the United States as a major export market, and the measure faced significant opposition from the Pentagon because it hurt the U.S. military's plans to acquire helicopters from Russia for use in Afghanistan. Several agreements were signed in 2011 and 2012 for more helicopters — with 30 still to be delivered through the end of 2014 — for approximately $1.3 billion. Sanctions could interrupt these deals.
 
Further sanctions in this area would have a large effect on Russia, which is a major supplier and market for Boeing. The U.S. firm's business with Russia has been relatively small since the fall of the Soviet Union, with $7 billion invested in Russia since 1991. However, the aerospace giant has large plans involving Russia over the next few years. Boeing wants to increase its investments in Russia to $27 billion by 2021, including an $18 billion deal to purchase Russian titanium, which is critical to Boeing's future production. Russia's aircraft construction sector cannot keep pace with domestic demand, and Boeing currently has an order for 100 planes for Russian airlines. Any sanctions in this area would have serious repercussions, both for Boeing and for Russia.
 
The White House has not yet clarified what sort of sanctions it is considering, and pressure from these giant U.S. firms will probably keep sanctions from preventing meaningful business in and with Russia. Without such measures, there is little Washington can do to make sanctions a meaningful threat.

The Possibility of Allied Sanctions

The only other way that U.S. sanctions would affect Russia significantly would be if the Europeans joined the effort. The European Union accounts for 52 percent of all of Russia's trade and 75 percent of foreign direct investment into Russia. As previously mentioned, European firms have a heavy presence in Russia, particularly in its energy sector. Europe is also the primary consumer of Russian energy, which accounts for 25 percent of Russia's gross domestic product and more than half of the Kremlin's budget.
 
Russian Exports

Russian Exports

 
Europe is already under economic stress, and any cutoff in trade with Russia would add to the pain, since Russia is the European Union's third-largest trading partner. Russia imports mostly machinery and transport equipment from the European Union. Most important to the Europeans, though, Russia is the source of one-third of Europe's oil and natural gas. Germany alone spends $41 billion annually on natural gas from Russia.
 
During a meeting March 6, EU leaders will discuss potential measures against Russia. However, all 28 EU member states would have to approve trade sanctions against Russia, and each state has a different relationship with Moscow.
 
In recent days, European leaders have been cautious about discussing any real sanctions. French Foreign Minister Laurent Fabius said France would maintain its military agreements with Moscow, and British Prime Minister David Cameron said the United Kingdom should not support trade sanctions or close London's financial center to Russia. Several European firms, including BP, have publicly said they will not curtail business with Russia.
 
The Europeans have thus far made mostly symbolic gestures against Russia, such as suspending negotiations on a visa liberalization agreement and suspending preparations for their leaders to attend the G-8 summit in Sochi in June. For now, the United States is alone in expressing its intent to punish Russia for its intervention in Ukraine. This is similar to 2008, when Russia went to war in Georgia and the West had no viable options for penalizing Moscow. In fact, it is notable that Washington is even taking steps to draw up scenarios for sanctions this time. 

Russia's Potential Response

If serious sanctions were enacted, Russia would respond. Moscow would probably freeze certain U.S. firms' operations in Russia. The Russian Duma is already drafting a law to allow the confiscation of property, assets and accounts of European or U.S. companies if sanctions are imposed.
 
However, Moscow cannot afford to bar all Western firms operating in Russia — its economy is slowing, and Russia needs Western technology and investment. Russia already is struggling to keep the ruble from tumbling, with investors wary over the Ukrainian crisis and possible sanctions. The Kremlin is currently spending between $10 billion and $11.3 billion a day to support the ruble. Russia's currency reserves and its national welfare and oil funds give Moscow a $658 billion cushion. But that could dry up fast if the ruble continues to decline and investors flee.
 
Russia could temporarily halt energy flows to Europe, but this would hurt Russia even more than Europe since Moscow relies on high energy revenues to keep its economy stable. Kremlin statements make it clear that Russia wants to avoid any option that would hurt its own economy or its trade with Europe.
 
Instead, Moscow would most likely respond in the realm of security. Russia could pull out of military agreements with the United States and NATO. Moscow could withdraw from the Intermediate-Range Nuclear Forces Treaty, which caps the range of U.S. and Russian missiles, or the Strategic Arms Reduction Treaty, which seeks to reduce the nuclear arsenals of both countries. This would essentially create a new arms race between the United States and Russia. Many within the Kremlin have suggested backing out of the treaties in recent weeks. This would be another option the Europeans would be wary of. Any security escalation between the United States and Russia would turn Europe into a geopolitical chessboard.
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