The Geopolitics of Sanctions against Russia

The United States and the European Union have imposed a sequence of sanctions against Russia following the Russian support for the "separatists" of Eastern Ukraine. Prof. Giancarlo Elia Valori discusses the implications of such sanctions in the context of the multipolar climate. Opinion

Russian Foreign Minister Sergei Lavrov, right, with his American counterpart Secretary of State Rex Tillerson (Photo: AP)

The US and EU sanctions currently operating against the Russian Federation were imposed following the Russian support for the "separatists" of the Eastern areas of Donetsk and Lugansk, Ukraine, namely ethnically Russian regions, which wanted to separate – or more likely to become autonomous – from the rest of the country.

It is hard to say whether the Ukrainian conflict was started at first by the Euromaidan's pro-Western militants or if either one or the former used violent ways and means because, as usual, the issue of sanctions is mainly political: to force – with mandatory commercial limitations extra omnes or, in any case, for the countries adhering to the primary international organizations – to reduce the political, economic, financial, and hence military potential of a target country.

With four executive orders, the United States has imposed a sequence of sanctions against Russia, while it is still unclear whether the sanction regime always fully hits the target country or if it manages to direct its negative repercussions only to the geopolitical sector to be targeted.

In the long history of sanctions, the excess of punishments towards the target country has always been a classic strategy, which later succeeds inadvertently to create mass support for the "bad" leader or the "dangerous" party, regardless of its being populist, sovereignist, "racist" or otherwise.

Today, the old ideologies of Evil do not apply any longer – hence we need to invent a new labeling for global defamation, well beyond the usual totalitarianism. Or we need to artfully create many media opportunities that often – if photographed – have no actual relationship with the crimes perpetrated by the target State.

In a way, sanctions are essentially the planned exclusion of the target country from the world market: in the case of Russia, the US sanctions are aimed at restricting the Russian access to the international financial services, to the US energy industry and obviously to the military industry.

These goals purpose are attainable both by reporting and blocking the personal and financial movements of specific personalities, such as entrepreneurs, financiers and managers of the target State placed in specific lists, now often public.

Or goods and capital are blocked.

Or again, always according to the American operating tradition, the potential for a debt of an enterprise of the enemy State may be reduced significantly, but only on the international market. Or there may be the prohibition of making certain goods, services and technologies available to the "target country."

In essence, for the Russian Federation, this still regards the extraction and refining of natural gas and oil.

Furthermore, the US sanctions against Russia are aimed at restricting the export of Russian military products and, in any case, imposing the block for spare parts or the construction of weapon systems that can ultimately be used in Russia as well.

In the United States, the economic sanctions are administered by OFAC and export controls are managed by the US Department of Commerce, Bureau of Industry and Security, in addition to the US Department of State, Directorate of Defense Trade Controls.

Without further complicating the framework, Directive No. 1 of OFAC regards the financial and service sectors of the Russian economy. It prohibits any transaction longer than thirty days with all the subjects included in the lists regarding people of Russian origin or, in any case, operating in favor of the Russian government.

Directive No. 2 prevents any type of economic or financial transaction for individuals and entities dealing with, offering or carrying out transactions, on behalf of the Russian system, relating to natural gas and oil coming from the Russian territory.

Following the same procedure of the above-mentioned transactions, Directive No. 3 deals with control and exclusion of the Russian Federation from the global market of military technologies.

Finally, Directive No. 4 regards the ban on normal commercial relations with Russia regarding the oil and gas from the Arctic and the unspecified "neighboring areas."

In 2014, by imposing measures "against the Russian industrial sector," the abovementioned Bureau of Industry and Security (BIS) implemented and improved the sanctions imposing a specific license on Russia for some commercial products, especially if the exporters know whether what they sell to Russia can be used, directly or indirectly, for gas and oil extraction or whether these exports can be used for deepwater exploration in Russia or anyway in the Arctic.

Furthermore, the aforementioned BIS blocks any export of products that may anyway contain parts which can be used in the current weapon systems.

After the "events" occurred in Crimea, the EU sanctions against Russia are quite different from the US ones, although they may often overlap.

This is the sign of a political and strategic overlapping that cannot take us a long way and that, indeed, many military elites, including NATO’s, consider obsolete.

This is certainly not due to anti-Americanism but to a complex assessment of the EU and US strategic and commercial goals.

Overlapping of new areas of influence or their natural future divergence? Naturally different interests between the EU and the United States in Africa and the Middle East or not?

The issue is complex and not well-defined yet.

Europe, however, has imposed more traditional sanctions against the Russian Federation, regarding individuals and implying travel bans or freezing of funds.

Furthermore, measures are envisaged in the EU limiting the access to financial capital for specific Russian financial and defense institutions.

There are also restrictions on the export of dual-use goods and technologies that may somehow refer to war operations, as well as other restrictions relating to the technologies included in the Common Military List, and obviously other restrictions on oil technologies.

There are many differences between the two sanction regimes.

The United States scrutinizes both oil and those working in this industry, while Europe only oil.

With specific reference to the EU sanctions, however, the Duma proposes to block the "commercial paper" issued by GAZPROM, which would imply that the European oil companies could be sanctioned if they bought GAZPROM payment notes which, however, are extraterritorial.

For the EU, currently the companies Rosneft, Transneft and Gazpromneft are the only ones that have been sanctioned.

None of the two sanction regimes, however, makes explicit references to "natural gas" – only oil is always mentioned.

Moreover, the EU legislation is not extraterritorial while, in case of suspicious dollar "transactions" through American banks, the US legislation can manage these transactions as if they were made on its national territory.

Has the United States probably built the complex web of anti-Russian sanctions since 2004 with a view to weakening the European competition?

As we will see later on, this is another possible hypothesis.

Besides seriously harming the European economy, which some important media sources estimate at over 100 billion euro for the whole EU, as well as two million jobs lost, we must consider that the effects are even more complex for the United States.

For the Russian Federation, however, the sanction effects are quite complex, even though it is a simple "target country."

In 2009, the Russian economy shrank immediately by 2.8%, following the classic rule whereby the economies subjected to sanctions are more sensitive to the asymmetric shocks coming from outside.

The following year, however, Russia grew by 4.5%, thus showing signs of recovery indicating a centralized and planned reaction to both the global crisis and the economic war operations, namely the sanctions against it.

Foreign investment in Russia is still falling, and according to the latest data of the Bank for International Settlements, loans from abroad have fallen from 225 to 103 billion euro.

Hence, not many dangerous effects, except for the magnification of the negative fluctuations in international markets.

So far, Russia has reacted to the closure of some Western markets with a brilliant and unexpected geopolitical move for the United States, namely the rapprochement with China.

In this regard, the effects are clear: the rapprochement has favored the block of the Ukrainian crisis, which becomes secondary in the Kremlin scenario. It has also facilitated the entry – even informally – of a large mass of Chinese capital into Russia and has finally added strategic value to the economic relationship between Russia and China.

The rapprochement has favored not only the commercial flows between the two countries, which had been falling since 2015 but has mainly given rise to old and new bilateral projects: a pipeline, other infrastructural networks, and cross-border free trade areas.

Furthermore, Russia and China, which are alien and even opposed to the logic of sanctions, are creating financial and commercial institutions according to their autonomous criteria, which will certainly be immune from US and EU sanctions.

As Putin knows all too well, the problem is that the relationship with China is fully asymmetric and runs the risk of generating Russian dependence on China.

Furthermore, Russia is not interested in the tension between China and the United States and does not want to be "involved" in the bilateral trade competition between China and the United States.

The positive aspects for Russia are the following: Russian weapons are particularly suitable for the Chinese market and the plans for the Siberian pipeline between Russia and China are still in place; Shanghai and Hong Kong will soon become the financial bases for many Russian companies; the vast commercial area thus created between South Korea, Vietnam and Taiwan already establishes a small Asian "EU system" that can act as an important stimulus for reviving the Russian economy.

On the other hand, China has never appreciated the Russian move on Crimea, even though it has never officially pronounced itself in this regard.

Never "make a sound in the East, then strike in the West." Currently, there are not the conditions for China to require – at military and strategic levels – what the "Western devils" can already provide at an economic level.

Moreover, the strategic suicide of the West is already fine as it is.

And again, the US and EU sanctions have enabled China to prevent its worst-case scenario in the Heartland, namely the final economic and political integration between Russia and Eastern Europe in the EU.

Moreover, this expansion east of the Russian Federation corresponds to a series of counter-sanctions culminating, for Russia, in the ban on European fruit and vegetables. The agricultural sector has been systematically brought to its knees by the Russian policies, which have created farmers’ strong political pressure to lift the sanctions against the Russian Federation.

Political use of an economic choice, namely counter-sanctions where the European "enemy" is weaker, that is in the protected and subsidized economy of the European agribusiness sector.

The Russian response has been the expansion of domestic production, with the strong help of Belarus supporting the "missing share" of the new "internal production."

The countermeasures of Russian consumers are as follows: certainly prices have risen, but they buy less and even fish consumption is falling.

Nevertheless, if we go back to the general architecture of sanctions against the Russian Federation, we can note many other facts.

For example, we can note that – apart from the weak traditional and media justification, with many "violent acts" artfully caused by militants of uncertain nature – the oil sanctions are designed to reach one single purpose, namely to make Europeans – who for too long have not "resorted to" the US producers – buy the shale oil and gas they are finally able to produce, indeed already in a situation of almost full energy self-sufficiency.

Hence, sanctions decided in the United States to compete with the North Stream 2 between Russia and Germany, crossing the Baltic and cutting the cost of natural gas to such levels that only dumping from the United States can be carried out to impose its gas against the one which can be found closer to our countries.

Dumping is useless: we can build an integrated economy between the United States, the EU, and Russia, with new geopolitical "rules of engagement."

Hence, the US sanctions are sanctions against Europe to rebuild manu militari the transatlantic market that could not be put back together elsewhere, not even in the agri-food sector where, in fact, the laws are already so differentiated between the United States and the EU to make any exchange impossible.

Economic war through rules and regulations.

However, while the dollar has risen to 76% against the ruble since the beginning of sanctions in 2014, it remains excluded from the Russian domestic market – hence it is a Pyrrhic victory.

In short, the Russian Foreign Minister, Sergei Lavrov, is right when he says that "sanctions are used to impose a regime change in Russia."

Between 2014 and 2017, some studies ascertained that there was a fall in the Russian GDP and some damage to its economy worth at least 170 billion US dollars.

Italy alone lost at least 1.25 billion euros, especially in the agri-food and small craft sectors.

However, let us revert to Lavrov: he is the right mediator and broker to gradually and reasonably put an end to the sanction regime imposed by the United States and the EU against the Russian Federation, of which he has been the Minister for Foreign Affairs since 2004.

Lavrov, who knows that "there are no alternatives to dialogue," also knows that Russia has not well clarified the situation of Crimea – beyond the objective truth which is hard to verify.

In this case, it is not a matter of discussing the right of the Russian-speaking populations in the region to join the motherland. The issue lies in finding how to create a united Ukraine, really respectful of its minorities and, above all, as autonomous from Russia as from the European and NATO designs.

A trilateral treaty between the EU, the United States, and Russia could be a good starting point.

Lavrov has the mediation skills and long experience needed for the job.

At the strategic level, it must be clear that NATO no longer expands itself towards the Donbass area and the Ukrainian-Georgian region, while the Russian influence operations – either covert or not – on those countries’ governments will be prohibited.

Obviously, old wounds and new appetites return: Poland’s desire to regain Ukraine it misses; the US and NATO passion for encircling the Russian Federation which, however, has already emerged from this encirclement with a clear victory in Syria, which proves its great strategic wisdom.

The encirclement of Russia with the NATO and US autonomous power is fully irrational.

The US bases also encircle Iran, another inevitable Russian ally: but what is the US strategic logic?

Hence a mediation will be needed, implying to reassure the United States that in Ukraine and Georgia there will never be "anti-Western" regimes, but Russia must be sure that all EU, Polish, US and other countries’ operations will not be such as to try to convince Ukrainians and Georgians to let Russia down in the region.

Moreover, Russia shall make it clear that after years of disastrous legacy of the "Cold War" its policy is trying to let the United States enter again new and old regions. These regions, however, must not be thought as no longer being in a situation of equilibrium – as we could reason at the time of the "Cold War" and the unfortunate post-Cold War period – since said equilibrium does no longer rely on strategic thinking but small territorial or positional conquests.

Furthermore, the United States could de-escalate tension with China through its new relations with Russia, which would act as an effective mediator and broker just because Russia has not – and will never have – common strategic and geopolitical interests with China.

If we begin to think in multipolar terms – where the United States has often developed its longest and most brilliant geopolitical projects – everything gets clearer.

This could be Lavrov's new job to be performed along with his US counterpart Tillerson.