On failed strategy and adjustment: Setbacks in the EU’s use of economic sanctions for deterring the Russian aggression on Eastern Ukraine, by Darlí Magioni Junior

There is much evidence that sanctions adopted by the members of the European Union (EU) against Russia’s breach of Ukrainian sovereignty are not properly working. Not only they did not do much to change the Kremlin’s policy, but also, domestically, it has been used as a powerful tool by Russian propaganda. This perception, allied with the damage these punitive measures are currently inflicting in EU countries themselves, is growing stronger in many European governments, and it is possible to make new extension and tougher restrictions harder to be approved, or, at least, to make implementation more difficult. Europe may have to invest in alternative ways.

Russian economic distress actually appears to have been caused by longstanding structural problems, which Moscow did not tried to solved after its GDP shrank around 7% after 2008’s financial crises, and other factors that are out of the EU’s control, such as plummeting oil prices, rather than triggered by sanctions. That is why forecasts point to economic recovery at the end of 2015 and the beginning of 2016, at the latest. Now that oil prices are seeing to be rising again, albeit slowly, quarterly results for March to June are possibly going for to be better. Currency volatility, as well, was not a Russian privilege, as many currencies have been through such adjustment due to a conjugation of the FED’s new restrictive monetary policy, at the same time BoJ and EBC are starting they quantitative easing programs. As for capital outflows, data actually shows that net results were worse before sanctions than after they were first imposed in April 2014 imposed. That data alone is sound evidence of poor results of sanction strategy.

Moreover, the effect these sanctions had on Russian public opinion was one of a worst-case scenario for the EU. Instead of generating Russian popular uprisings against Russian military mobilization in Eastern Ukraine, or pushing for regime change, as the US expected, the result was clearly the opposite. According to Levada-Centre (2015), a pollster, Mr Putin’s approval rate is currently at 85%. Since the annexation of Crimea and the invasion in eastern Ukraine his popularity has soared, and the effect was so dramatic that even the death of Boris Nemtsov, which actually made people to react in a more incisive manner, was not able to deliver a drop of at least two percent. In many responsive democracies, even a 60% approval rate is unlikely to make a president to change its course of action, despite the other disapproving 40%. In Russia’s low quality democracy, according to the standards of Freedom House (2015), that is even harder to happen!

Economic sanctions, on the one hand, have indeed caused some bruises to Russian economy, as some important banks, Bank Rossyia for example, have been into troubled times. In general, however, those targeted by these measures, mainly from Mr. Putin’s inner circle have found very creative ways to dodge it, undermining the credibility of the sanctions. Most of the companies affect by restrictions are only listed because of links to supposedly very influent people in the administration, but with well-timed share transfers, creation of subsidiaries, and the use of the customs union with Belarus to import western goods through this country they are successfully bypassing the embargo. In the meanwhile, Russian trade ties with Turkey, Latin America and especially China, by the Shanghai Cooperation Organisation, are strengthening. Using concepts from Keohane and Nye (1977), Russia is reasonably sensitive to western sanctions, but far less vulnerable than many countries expected.

The EU, on the other hand, has also suffered serious setbacks for its strategy. A remarkable political one is that Russia formally withdraw from the European Treaty on Conventional Armed Forces, considered one of Europe’s most important instruments for keeping the region stabilised. Although in practice, Russia stopped respecting this agreement seven years ago; to be formally leave this regime constitutes a symbolic firm change of attitude towards European peace and security. Economically, while trying to isolate Russia, the Kremlin’s retaliatory measures have inflicted significant damage to EU’s agricultural sector, one of the dearest concerns of the common market, leading to a fall in prices and stockpiling, which is a threat to EU’s Common Agriculture Policy. Russia alone bought around a third of Europe’s agricultural production in 2013, and restrictive exports to this country and decreasing investment have serious consequences for European farmers. In addition, amidst the crossfire, Ukraine itself is suffering the most.

European Council’s president, Donald Tusk, said in March 18th that: “If Putin splits the unity … among the leaders of the EU member countries, this will be the biggest success story of President Putin and this will be a disaster for the free world,”. Unfortunately, for Mr. Tusk, this is what seems to be happening. Facing little positive results, according to Bloomberg (2015), sanctions against further economic war were refused by Austria, Hungary, Greece, Spain, Italy, Cyprus and Slovakia. All these countries have somewhat close economic links with Russia. Sanctions were never a unanimous strategy between EU members, but they enjoyed a weak consensus. But disappointing outcomes are posing a serious threat to it, and the longer this situation persists the more unbearable divisions will become.

Italy, for example, has never been an enthusiast of EU’s sanctions. The country has enjoyed good relations with Moscow especially since Silvio Berlusconi took office Italy’s prime minister, and is Russia’s second biggest trade partner in the EU. Sanctions undermine Italian exports to Russia, notably for luxury products, and also hurts Italian businesses operating in Russian soil. The main problem, however, lies on Italy’s concern with the situation in Syria and Iraq, due to flows of refugees, and Libya’s turmoil, since the latter is Italy’s other great oil and gas supplier, for this country hoped to gain Moscow’s support in solving these problems. The opposition to sanctions is so evident that many national parties, notably the Northern League Party, are pressuring Matteo Renzi to convince its EU counterparts.

Hungary’s illiberal democracy, as its own president describes it, makes an even stronger opposition. President Orban stated that sanctions are hitting the EU harder than Russia and he called for political autonomy for another group in Ukraine: Ethnic Hungarians in Western Ukraine. In fact, even many Germans, whose country is the main upholder of consensus around sanctions, including a form chancellor and a former president, are calling for the end of Russia’s isolation.

European Common External and Security Policy (CESP), which is formulated by the High Representative, Federica Mogherini, and the Commission, depends on the consensual approval of the European council and since the Treaty of Amsterdam of 1997, member states have the faculty of “constructive abstention”. This option was engineered to make easier for states to agree on the CESP. Even so, it is increasingly  difficult for many to abstain from becoming a naysayer. Following premises of institutional theories (MEARSHEIMER, 2004), the EU has played an essential part in discouraging states from calculating self-interest. This is true to some extent. Indeed the EU itself, obviously following French and German leadership, so far has constrained states from blocking new rounds of sanctions.  That may not last forever because such discouragement has never been so weak. The coordination problem in this case is of multiple equilibria. There is more than one cooperative outcome for the situation in Ukraine, but due to different preferences in distributional implications, EU members are having a hard time deciding which of these outcomes is preferred (KEOHANE & MARTIN, 1995).

On paper, after a European Council summit in Brussels on March 19th, heads of state and government decided to link lifting sanctions to the observance of what was agreed by the Minsk semi-cease-fire agreement, which would extend part of (not all) the sanctions at least until December. In practice, tough, that may not be the case. Although the decision to impose sanctions is a collective decision, implementation is a task for each member state, ill supervised by the European commission and the European External Action Service, so states may simply stop implementing them, or at least impose a sort of phony sanctions. Therefore, even if EU members decide to extend rather than blocking new Tier 3 sanctions in the next meeting in June, it is hard to believe they will effectively do so. Moreover, the Minsk agreement itself is a demonstration that the EU no longer wants to maintain its own sanctions, because, ultimately, Germany and the other gave Russia the power to negotiate the terms of the lifting, while playing an illegitimate role in deciding Ukraine’s fate. The moto for EU leaders seems to have been “Ukrainian territorial integrity at any cost”, that they did not care much about the fact they were themselves restricting the possibility of new sanctions.

If something was working and made Russia more bound to sign the new Minsk Agreement in February 12th, it was Mr. Hollande and Ms. Merkel active presidential diplomacy (as they were one of the fill that still had Vladmir Putin’s ear at their disposal), and Anglo-American hawkish stance of posing real threat of arming Ukrainian government forces. This is not to say that EU countries and Russia should return to business as usual, as they did after 2008 invasion in Georgia, because it would open a terrible precedent regarding annexation, but in a context of extreme interdependence, the EU should surely review their current sanctions if it does not want them to backfire. Finally, engaging more fiercely in its “disinformation campaign”, it is imperative for cutting public support to Russia’s war in Ukraine, and Federica Mogherini should play an essential role in this front.

References:

  • KEOHANE, Robert O. & NYE, Joseph. Power and InterdependenceWorld Politics in Transition.  Boston, Little, Brown and Company, 1977.
  • KEOHANE, Robert O. & MARTIN, Lisa. The Promise of institutionalist Theory. International Security, Volume 20, Number 1, Summer 1995, pp. 39-51
  • Levada-Center main page. Modified Daily. Accessed on March 25th, 2015. http://www.levada.ru/eng/
  • MEARSHEIMER, John J. The false Promise of international institutions. International Security, Volume 19, No. 3, 2-19.
  • NEUGER, James. Is EU Support For Russia Sanctions Waning. See who’s visiting the Kremlim. Published on March 17th, 2015, Accessed on March 17th, 2015. http://www.bloomberg.com/news/articles/2015-03-17/putin-s-guests-show-diminishing-eu-backing-for-sanctions
  • Prominent Germans urge West to stop sabre rattling toward Russia. RT News. Published on December 8th, 2015. Accessed on March 26th, 2015: http://rt.com/news/212107-germany-russia-relations-peace/
  • Russia, Freedom in the World Report 2015. Accessed on 20th March, 2015. https://freedomhouse.org/country/russia#.VRbFxPnF-So

Darlí Magioni Junior está vinculado ao programa de Master of Arts in International Peace and Security da King’s College London.

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