Sanctions Will Widen the Russia-West Rift in 2019

8 MINS READFeb 21, 2019 | 10:00 GMT
Ukrainian servicemen take part in a drill on Azov Sea on Jan. 20, 2019.

Ukrainian servicemen take part in a drill on Azov Sea on Jan. 20, 2019. On Feb. 13, a group of bipartisan U.S. senators from the Senate Foreign Relations Committee introduced a bill to ramp up sanctions against Russia due to its alleged interference in U.S. elections and its "malign" activities in Ukraine and Syria.

  • The United States is all but guaranteed to increase sanctions against Russia in the coming months.
  • With Congress's hawks demanding a hard line on Moscow and the White House favoring moderation, the extent of U.S. sanctions will fall somewhere between the two extremes.
  • The European Union will also increase sanctions against Russia, albeit to a much more limited degree than the United States.
  • Russia will succeed in managing the economic fallout from the sanctions with its sanctions insulation strategy, but prolonged measures will continue to undermine the country's longer-term economic outlook.

Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Second-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis on key developments over the next quarter.

Five years in, the standoff between Russia and the West shows no signs of abating. On Feb. 13, a group of bipartisan U.S. senators from the Senate Foreign Relations Committee introduced a bill to ramp up sanctions against Russia due to its alleged interference in U.S. elections and its "malign" activities in Ukraine and Syria. In the meantime, reports have emerged that both the United States and European Union are close to passing a new set of sanctions against Russia over the showdown between Russian and Ukrainian forces in the Sea of Azov

The Big Picture

In its 2019 Annual Forecast, Strafor wrote that the West would impose additional sanctions against Russia as the standoff between Moscow and the West continues. Recent sanctions packages suggested by the United States and the European Union indicate that Western economic pressure on Russia will indeed increase in the coming months amid growing frictions between the two sides.

The potential sanctions packages come a half-decade after the initial cause of the Russia-West standoff — the Ukrainian conflict, including Russia's annexation of Crimea and the separatist conflict in Donbas. Since 2014, Western sanctions against Russia have expanded from their narrow focus on the Ukraine conflict to encompass a number of issues, ranging from Moscow's political meddling in the United States and Europe to arms control and North Korea. The strategic intent of the sanctions is to alter Russia's behavior as it applies to Moscow's broad range of hybrid warfare tactics by curtailing military operations in Ukraine and Syria and halting covert, online and propaganda activities in the heart of the United States and Europe. And as far as the West is concerned, if the sanctions fail to change Moscow's behavior, then they will at least inflict economic pain or create political rifts within the Kremlin, thereby weakening oligarchs' ties to the government. And given that Russia is unlikely to plot a new course in Ukraine or Syria as a result of increased sanctions, the West's measures are only likely to inflame Moscow-West tensions. 

Congress Drives the Debate

While entities like the European Union and the United States have remained broadly aligned when it comes to using sanctions to influence or punish Russia, the actual implementation of sanctions has depended on the interplay of various actors. On the EU side, sanctions are subject to a vote by all 28 member states; countries like Poland and the Baltic states fiercely support measures against Russia, while others like Hungary and Greece have preached moderation and pragmatism. Until now, EU countries have voted unanimously to maintain sanctions, but the scope of the bloc's measures is generally narrower than those of the United States due to the deep economic ties between the European Union and Russia, particularly on energy.

For the United States, the primary driver is Congress, which introduces sanctions legislation, and the Treasury Department, which specifies and implements the laws in question. A key component of sanctions legislation is the Countering America's Adversaries Through Sanctions Act (CAATSA), which Congress passed in 2017 amid concerns that U.S. President Donald Trump could try to lift sanctions against Russia in a bid to improve relations with Moscow. The centerpiece of CAATSA was a congressional review provision that effectively prohibited Trump from abrogating any existing sanctions against Russia without legislative approval. 

Since CAATSA's passage, the United States has taken several important sanctions measures against Russia. In January 2018, the Treasury Department submitted the so-called "Kremlin Report" to Congress, highlighting key Russian officials, oligarchs and their companies as potential sanctions targets. Three months later, the Treasury Department announced the harshest sanctions to date against a variety of Russian individuals and entities, including 17 senior Russian government officials, seven Russian oligarchs and 12 companies they own or control, including Rusal, Russia's largest aluminum company and the second largest in the world.

Later in 2018, Congress introduced two more important sanctions packages: the Chemical and Biological Weapons Control and Warfare Elimination Act, a response to the poisoning of former Russian spy Sergei Skripal, and the Defending American Security from Kremlin Aggression (DASKA) Act of 2018, a bipartisan bill introduced by Senators Lindsay Graham and Robert Menendez over Russia's interference in U.S. elections and its role in the Ukrainian and Syrian conflicts. The packages included broader, sector-level sanctions against Russia that banned dollar transactions for major Russian banks and sovereign debt issuances, indicating that the United States was prepared to turn the economic screws on Russia. 

But despite the introduction of these motions, they have had little effect on Russia so far. The Trump administration only implemented the initial phase of the Skripal-related sanctions, banning sensitive, national-security related exports to Russia, while DASKA didn't make it through Congress. Meanwhile, the U.S. Treasury Department formally lifted sanctions against Rusal and its parent company, EN+, in January after months of negotiations with the aluminum giant's owner, Oleg Deripaska (who, incidentally, remained on the sanctions list even though he agreed to reduce his ownership stakes in Rusal), and contentious consultations with Congress. In the end, the sanctions on Rusal also impacted Europe and the United States by driving up global aluminum prices, proving that U.S. sanctions can have their limits. 

The Sanctions in Store

Moving forward, it is all but inevitable that the United States and the European Union will increase sanctions against Russia, although Brussels is likely to again pursue more limited sanctions than Washington. Before the end of March, the bloc is likely to impose sanctions related to the Sea of Azov and impose travel bans and asset freezes on eight Russian security officials involved in the detention of Ukrainian sailors last November. The United States, in the meantime, is likely to place more security officials on its sanctions list, while it is also mulling restrictions against Russia's shipbuilding sector if it further hinders Ukraine's freedom of navigation.

Moving forward, it is all but inevitable that the United States and the European Union will increase sanctions against Russia.

But there are other more serious restrictions that the United States will consider against Russia this year. Certain members of Congress have spoken about the need to increase sanctions pressure on Russia, in part because the Trump administration has yet to implement the various sanctions packages introduced last year. As a result, some senators have submitted a new motion that has been touted as a tougher version of DASKA. The bill includes sanctions against Russian banks, sovereign debt issuances and investment in Russian LNG projects outside the country. Congress is also likely to increase pressure on the White House to follow up on the initial introduction of the Chemical and Biological Weapons Control and Warfare Elimination Act with greater measures, including a ban on Aeroflot flights to the United States, the restriction of U.S. bank loans to Russia and a downgrade to bilateral diplomatic relations.

Such sanctions packages could have profound implications for the Russian economy, but their impact will depend on the extent of their actual implementation. Restrictions on Russian sovereign debt issuances would significantly push up borrowing costs for Russia and further depress investment in the country. Sanctions on Russian bank transactions could force the Russian Central Bank to support ailing lenders, undermining its ability to stabilize the ruble and contain inflation in the country. These, however, would be the more extreme scenarios, and the Trump administration is likely to push back against any measures that could have ripple effects beyond Russia, such as a prohibition on transactions by major Russian banks and globally integrated companies. Instead, the Treasury Department is more likely to go after more Russian individuals and entities on a case-by-case basis, while negotiating with Congress to find a middle ground on sanctions expansions to further pressure the Kremlin without disrupting entire economic sectors.

Chart of Economic Indicators in Russia, Related to Sanctions

Russia Battens Down the Hatches

For its part, Russia has had five years to adjust to, and prepare for, Western sanctions, during which time it has developed a robust sanctions insulation strategy. As part of its efforts, Russia has reduced its external debt to its lowest level in 10 years, accumulated foreign currency reserves of nearly $500 billion, reduced its holdings of U.S. Treasury bonds in favor of euros, yen and yuan, as well as expanded economic ties with non-Western countries, particularly China. Russia has thus worked to limit its exposure to the United States and created a large enough cushion to manage future economic shocks in the event of more serious sanctions. 

Such measures, as well as the continued back-and-forth between Congress and Trump over the scope of sanctions, indicate that Moscow will likely avoid any major economic disruptions in the short term. Prolonged sanctions, however, will undermine Russia's long-term economic outlook, as such measures will sever access to Western financing and technology and erode Russia's broader economic ties with the West. This growing economic divide, coupled with Russia's resistance to conceding on strategic matters of dispute like Ukraine and Syria, will only exacerbate the Moscow-West standoff — along with the contentious geopolitical issues that are leading to such sanctions in the first place.

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