As things are getting worse in Crimea, the western power has been trying to take action against Russia. The EU leaders (and President Obama) have been considering how much more pressure they should put on Putin over Russia’s annexation of Crimea. The U.S. and the EU claim that Russia has violated Ukrainian sovereignty and have put 28 Russian officials on their list of travel bans and asset freezes. The point, however, is that it seems like Russia does not care at all, so the EU leaders are now trying to put more pressure with serious economic sanctions.
However, it may be difficult for them to do so. According to CNN, Russian oligarchs, banks, and corporations have been borrowing heavily from the west, indicating the risks for both sides in the Ukraine crisis. Also, Europe and Russia have close trade and investment ties, worth more than $ 500 billion a year. Economists predict that the Russian economy will be severely affected by the Ukraine crisis and may not grow at all in 2014. Economists also warn that “European banks stand to lose much more than their U.S. counterparts if the crisis were to deepen.” This means that no matter how delicate their sanctions will be, these actions will hurt both of the EU and Russia.
If you look at the chart, you see that the European lending to Russia at the end of September 2013 was $ 184 billion. French banks have lent the most ($51 billion), followed by Italy ($29 billion), Germany ($24 billion), the U.K. ($19 billion), and the Netherlands ($18 billion). If the EU does put more pressure against Russia, then it will hurt both of the economies due to their close economic relationships.
5 Comments
Sanctions are best viewed through the lens of “all politics is local” – they are a sop to domestic interests, because even naive politicians don’t expect them to accomplish anything. They do on occasion hurt ordinary people in the target society, but all too often serve to strengthen the position of elites. The environments that lead to sanctions often mean the economy is doing poorly; we give elites an outsider to blame. Elites find it very convenient to claim patriotism is at issue, country XXX is undermining our great nation, and it’s again all too common that we strengthen the political hand of those whom purportedly we want to see weakened.
For a good analysis see Gary Hufbauer et al., Economic Sanctions Reconsidered which in their 3rd update (2007) covers 300+ cases, finding roughly 1% helping achieve the claimed political goals.
Over the past several decades, the US and the EU have proven their ability to significantly damage a nations economy through economic sanctions. For example, the recent trade sanctions on Iran have caused a significant recession in the country, particularly hurting it’s energy sector. While the West, particularly the EU, has the ability to deal a devastating blow to the Russian economy through trade sanctions, these sanctions will be equally crippling to the western economies. Even the thriving German economy would be crippled if they were cut off from Russian energy sources. England, particularly London, would also be hit hard if the recent inflow of Russian capital into their real estate markets was recalled.
However, while a sanction war would hurt economically, in the long run it is likely beneficial and necessary for the health of the global economy. Investors enjoy peace and stability and the actions by the Russian Federation represent the most destabilizing diplomatic action since the collapse of the Soviet Union. This blatant violation of their 1994 treaty with Ukraine and this demonstrated disregard for international sovereignty will shake the confidence of investors and reduce foreign investment in both the east and west.
Rather than removing Russia from Crimea which most of the world really doesn’t care about, sanctions are used to punish transgressions and try to curb future aggressions. Blizzard’s post reminds us that in the long run sanctions are possibly preventing more costly types of conflict which are things models have difficulty accounting for.
Despite negative economic effects to both parties, they will still choose to do what they think they need to do in politics. The sanctions are warnings given by EU and US to remind Russia of their political power. And I’m sure Russia knew the consequences before their decided to take over Crimea.
I doubt that Putin will care though.
If Putin does not respond, then the the western powers will also be faced by the consequences.
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