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Impact of US and EU Sanctions on Russia
Introduction on Impact of US and EU Sanctions on Russia
Impact of US and EU Sanctions on Russia, The international political economy is as complex as it gets.There are several different factors at play at the same time that makes it extremely difficult if not impossible to analyze relationships between countries and evaluate the impact of one factor. The relationship between Russia, formerly known as the Soviet Union, and the US can be best described as uncomfortable at best.
At times the ties have become severely strained. However, in recent times the two countries have maintained diplomatic ties and expressed commitment to pursue common objectives like curbing the threat of terrorism (Nelson et.al, 2015, pp. 1). That was until the Ukrainian crisis turned up in 2014. Since then the relationship has been disintegrating as the United States has led the charge for economic sanctions on Russia. The European Union was quick to follow and has come up with its own set of sanctions.
The objective of this document is to understand the sanctions that have been applied in Russia and the effects that they would bring to the Russian economy.
Discussion
To understand the dynamics at play better, an effort would be made to analyze the sanctions applied separately. First we identify the role of the EU. The sanction announced on 12th September 2014 by the EU intended to target three of the most important sectors of the Russian economy; state finances, arms and energy. Another reason to go ahead with these sectors first was that these areas of the economy have remained under control of the close associates of the president Vladimir Putin (Dolidze et.al, 2015, pp. 3).
Some effects of these sanctions were more visible than others for example it was imminent that Russian banks would not be allowed access to EU finance markets any more to raise long term loans. The EU also refused to continue exporting dual-use equipment that could be used for military use in Russia. Additionally exports of a wide range of oil industry technology were also stopped at the source.
Three state oil firms were identified that needed to be targeted including Rosneft, Transneft and Gazprom Neft. However not all industries in Russia have been targeted by the sanctions. Some notable exceptions include the space technology, extraction of gas and exploration industry and the nuclear energy sector (Dolidze et.al, 2015, pp. 3).
Sanctions approved by the European Union also do not limit to industries. EU has shown full commitment in pursuing the US lead to target individuals inside the inner circle of the Russian president. Dozens of separatist leaders and senior Russian government officials have thus come into radar.
The EU together with the US explicitly stated that any individuals identified with the crisis in Ukraine who were either providing material or financial support to the separatists or were trying to undermine Ukraine’s territorial authority and sovereignty in any way would be targeted. As the first step to this approach, ‘Bank Rossiya’ was targeted (Karpowicz et.al, 2015, pp. 32). The financial institution has been identified as the personal bank for many senior Russian officials including the major shareholders Yuri Kovalchuk and Nikolai Shamalov.
These two were also identified with the founding of a mysteriously run housing cooperative which they made massive money out of under Vladimir Putin. In addition to these two, Arkady Rotenberg and Sergie Chemezov are also on the black list put up by the European Union. Arkady has remained a close associate of the president and is in charge of various infrastructure projects on top of winning lucrative contracts for the Sochi Olympics 2014. He also owns the SMP Bank (Karpowicz et.al, 2015, pp. 33). Chemezov on the other hand is the director of the state arms corporation.
The EU has also gone ahead and unlike the US has blacklisted all Russian intelligence heads (Karpowicz et.al, 2015, pp. 36). All these individuals have been put under asset freezes which indicate that they would not be allowed to sell or buy assets inside the EU and also travel bans that would not allow them to visit an EU country even on even if in transit.
The United States authorities also came up with their own set of sanctions on Russia. Several notable Russian personalities have been put on the black list. One of them is Gennady Timchenko the owner of the Volga group. The group has interests in different Russian industries including finance, energy and gas production (Nelson et.al, 2015, pp. 2). Igor Sechin, a long term companion of Putin and also an intelligence officer is also on the list. Sechin is chairman of Rosneft the oil giant and enjoys corporate partnerships with names as big as ExxonMobil and British Petroleum. In July last year the US showed that it was willing to put further pressure on Russia by expanding items and people on the black list. The new additions mostly included what EU also has on its black list, Rosneft, Novatak and Gazprombank. However, the US has also targeted a Russian bank that was established way back in Soviet times (Nelson et.al, 2015, pp. 3).
In September 2014, another wave of sanctions followed. Russia’s biggest bank, Sberbank, defense conglomerate Rostec and Gazprom were notable names that were targeted in the new sanctions. No dealings with the institutions on the black list were allowed to any US citizen. Like the EU, US authorities have also set up a ban on the export of heavy machinery to Russian oil and gas exploration companies operating in the Arctic and other deep water exploration areas (Karpowicz et.al, 2015, pp. 21). As evident from the discussion above, a lot of sanctions have been applied to Russia with the intention of influencing the decision makers to get their actions in line with the desires of the international community. The question that remains then is whether these sanctions have been effective in crippling the Russian economy?
Impact of the sanctions
The sanctions put forward by the EU and the US has been effective in terms of covering all important sectors of the Russian economy. The country’s financial markets, energy and defense sectors have all experienced the negative effects of the sanctions as evident by changes that have come about in different aspects and dimensions (Dolidze et.al, 2015, pp. 6). Firstly Russia has been hit by a slide in oil prices. Since the country is the world’s second largest exporter of crude oil and relies heavily on oil sales to finance its budget, the slide has badly affected its revenue management. The slide has come in as a second shock after the sanctions and for the first time in five years, Russia faced a contracting economy in terms of activity (Dolidze et.al, 2015, pp. 6). Some prominent effects of the sanctions are discussed below:
• Russia faced a massive currency collapse in 2014. To prevent a run on the currency, the Russian Central Bank had increased the interest rates from 10.5 percent to 17 percent. This price hike was highest since the famous economic crisis of 1998. Following this the Rubble fell in value against the Dollar and despite government efforts to stabilize the currency, a fall of 41 percent in value was recorded (Nelson et.al, 2015, pp. 2).
• The higher interest rates were meant to support the falling currency and show the resolve that Russia was willing to overcome any obstacles put its way however the higher borrowing costs affected Russian domestic industry who showed decreasing willingness to borrow (Karpowicz et.al, 2015, pp, 45).
• Whilst the effects of the decrease in oil prices cannot be isolated and analyzed separately from the sanctions, a definite combination of the two is leading Russia towards recession and an inflated economy. Inflation estimates show that inflation might exceed 10 percent at the end of 2015 (Karpowicz et.al, 2015, pp. 45).
• As an economy shows increasing signs of plunging, foreign..
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