Risky Blowback from Russian Sanctions

Today’s American foreign policy “elite” rarely thinks through the dangerous consequences of its “tough-guy” actions, including its new plan to provoke economic and political chaos in nuclear-armed Russia, a “strategy” that is also spreading pain and disorder to Europe, as Jonathan Marshall explains.

By Jonathan Marshall

Last month, as President Barack Obama prepared to sign tougher sanctions legislation aimed at Russia, the top White House economist, Jason Furman, boasted that the West’s economic warfare was already bringing Russia to its knees.

“If I was chairman of President (Vladimir) Putin’s Council of Economic Advisers, I would be extremely concerned,” Furman said. Declaring that Putin and his circle were “between a rock and a hard place in economic policy,” Furman crowed that “the combination of our sanctions, the uncertainty they’ve created for themselves with their international actions and the falling price of oil has put their economy on the brink of crisis.”

Russian President Vladimir Putin addresses a crowd on May 9, 2014, celebrating the 69th anniversary of victory over Nazi Germany and the 70th anniversary of the liberation of the Crimean port city of  Sevastopol from the Nazis. (Russian government photo)

Russian President Vladimir Putin addresses a crowd on May 9, 2014, celebrating the 69th anniversary of victory over Nazi Germany and the 70th anniversary of the liberation of the Crimean port city of Sevastopol from the Nazis. (Russian government photo)

There’s no denying the perilous state of Russia’s economy. One month earlier, Russia’s Finance Minister Anton Siluanov had predicted that sanctions and lower oil prices would cost the Russian economy as much as $140 billion, equal to about 7 percent of GDP. Over the course of 2014, the ruble lost 46 percent of its value, only to drop another 7 percent on the first day of trading in 2015. Russia’s central bank estimates that the country suffered net capital outflows of $134 billion last year, setting the stage for a painful depression.

“We are going through a trying period, difficult times at the moment,” Putin conceded to a large group of international reporters only days after Furman’s comments.

But as scholars and pundits have been telling us for years, in today’s globalized world, no major problem, economic, political, or military, stays local for long. Punishing Russia for its annexation of Crimea and its continuing support for Ukrainian rebels is likely to create a host of unintended and costly repercussions for the United States and Europe.

Unlike some targets of U.S. sanctions, like Cuba or North Korea, Russian’s economy is big enough to matter. Its free-fall may well drag the precarious EU economies part way down with it.

Asked by Bloomberg whether the world could see a financial contagion result from Russia’s economic plight, West Shore Funds Chief Global Strategist James Rickards said, “I think we will. This resembles 1997-98 more than it resembles the 2007-8 panic. Remember that started in Thailand in June 1997, then it spread to Indonesia, then to South Korea, blood on the streets in both place, people were killed in riots, then it spread to Russia. . . . It was the classic example of contagion.”

Rickards added, “there’s a lot of dollar-denominated corporate debt [in Russia] that they may not be able to pay. . . . If that stuff starts to default, who owns it? Well, it’s owned by U.S. mutual fund investors, it’s in 401Ks, some of it’s in European banks. If you own Banco Santander and Banco Santander has a big slug of Russian corporate debt, how does it go down? They can point a finger at the Russians, but when that debt goes down, it’s going to come back to haunt us.”

That’s hardly a fringe concern. Thomas Friedman has also sounded the alarm: “Russia’s decline is bad for Russians, but that doesn’t mean it is good for us. When the world gets this interconnected and interdependent, you get a strategic reverse: Your friends, through economic mismanagement (see Greece), can harm you faster than your enemies.

“And your rivals falling (see Russia and China) can be more dangerous than your rivals rising. If Russia, an economy spanning nine time zones, goes into recession and cannot pay foreign lenders with its lower oil revenues, and all this leads to political turmoil and defaults to Western banks, that crash will be felt globally.”

Europe’s Doubts

European leaders appear to be having second thoughts about the wisdom of playing a game of economic chicken when their own national economies are so weak. Austrian, French, German and Italian leaders, meeting at a Brussels summit in December, all warned that Russia’s financial crisis could blow back against their own economies.

“The goal was never to push Russia politically and economically into chaos,” said Germany’s Vice Chancellor Sigmar Gabriel.

In a similar spirit, French President François Hollande told a radio interviewer that sanctions, which included the cancellation of the delivery of two Mistral helicopter carriers to Russia, were both unnecessary and counterproductive.

“Mr. Putin does not want to annex eastern Ukraine,” Hollande said. “What he wants is to remain influential. What Mr. Putin wants is that Ukraine not become a member of NATO.” As for sanctions, Hollande said, “I’m not for the policy of attaining goals by making things worse. I think that sanctions must stop now.”

Such concerns did not dissuade Congress last month from unanimously passing tough new bans on financing and technology transfers, along with $350 million in arms and military equipment to the Ukraine and $90 million for anti-Putin propaganda and political operations in Russia. Former Rep. Dennis Kucinich noted that this momentous legislation passed the House of Representatives late at night with only three members present.

Careful What You Wish For

Promiscuous use of sanctions against Russia and a host of other international targets ironically could come back to haunt the United States by undermining the very neo-liberal principles it has championed for decades to undergird U.S. economic expansion.

Putin sounded more like a leader of the Trilateral Commission than an ex-KGB officer when he warned last fall, “Sanctions are already undermining the foundations of world trade, the WTO rules and the principle of inviolability of private property. They are dealing a blow to [the] liberal model of globalization based on markets, freedom and competition, which, let me note, is a model that has primarily benefited precisely the Western countries.

“And now they risk losing trust as the leaders of globalization. We have to ask ourselves, why was this necessary? After all, the United States’ prosperity rests in large part on the trust of investors and foreign holders of dollars and U.S. securities. This trust is clearly being undermined and signs of disappointment in the fruits of globalization are visible now in many countries.”

Ian Bremmer, president of the Eurasia Group and foreign affairs columnist for Time magazine, echoed Putin’s comments in his recent global survey, “Top Risks 2015,” which warned that “American unilateralism is stoking dangerous trends” around the world. “I’m very far from a pessimist, but for the first time since starting the firm in 1998, I’m starting to feel a serious undercurrent of geopolitical foreboding.”

With regard to economic sanctions, Bremmer observed, “The most important near-term challenge is the damage inflicted on transatlantic relations. Europe will become more frustrated with an American unilateralism that Europe (and European banks) must pay for. Also, the U.S. could well slap new sanctions on Russia and/or Iran, eliciting a backlash in 2015.

“Over the longer term, though, others will diversify away from reliance on the dollar and U.S.-dominated institutions, particularly in East Asia, where China has the muscle and the motive to create its own institutions, and where there is less dollar-denominated debt to complicate the process. . . .

“And a fat tail concern for 2015, also related to the rise of strategic sectors: Governments targeted by sanctions will increasingly treat companies that comply with them as instruments of American power. This will expose these firms to heightened risks of retaliation from regulatory harassment to contract discrimination to cyber-attacks. The U.S. financial sector is particularly vulnerable on this count.”

Political Repercussions

The long-term consequences of such sanctions could extend far beyond the cost to our own and other Western economies. Already U.S.-Russian cooperation on arms control has been imperiled. Pushed to the wall, Russia may decline to continue its essential cooperation with regard to resupply corridors into Afghanistan, the Iran nuclear negotiations, and a political settlement in Syria, all of which rank far higher in any rational list of priorities than the fate of the Eastern Ukraine.

As Bremmer warned, “A Kremlin that feels antagonized and isolated but not substantially constrained is a dangerous prospect. An aggressively revisionist yet increasingly weak Russia will be a volatile actor on the global stage in 2015, posing a top risk to Western governments and businesses throughout the year.” He predicted the possibility of more stealth cyber-attacks, confrontations with NATO, and tighter bonding between Russia and China at the expense of the West.

If, as many Russians believe, the real aim of sanctions is regime change, just as President Richard Nixon promoted a military coup against Chile’s Salvador Allende by ordering policies to “make the economy scream”, most observers agree the West could end up with a far more antagonistic regime post-Putin.

In the short run, of course, sanctions simply inflame Russian nationalism and bolster Putin’s popularity. But in the longer run, observed Russia expert Angus Roxburgh in The Guardian, “Pouring fuel on Kremlin clan wars that we barely understand would be the height of folly. We have no idea what the outcome might be and it could be much worse than what we have at present.”

The longer the Ukraine conflict simmers, the more extremists on both sides gain leverage. Writing last September in The Moscow Times, Natalia Yudina noted that “a significant number of right-wing Russian radicals are now actively fighting in Ukraine. Whereas they previously took part in social networks, historic war battle reenactment groups and all sorts of quasi-military training camps, they are now gaining real-world combat experience.

“Following the conclusion of the conflict, most will inevitably return to Russia, where their long-standing dreams of staging a ‘Russian revolt’ or ‘white revolution’ will no longer seem so difficult an accomplishment. And that means that one more consequence of this war will be a sharp escalation of activity by right-wing radicals , only this time, in Russia itself.”

Without a crystal ball, we have no way of knowing whether the new cold war with Russia will thaw or go into a deeper freeze. But it seems abundantly clear that economic sanctions and political confrontation over the fate of the Eastern Ukraine magnify the risks to global order far out of proportion to any real U.S. and Western interests.

It’s worth remembering, with the centenniary of World War I just past, that economic collapse and social disruption are more likely to sow the seeds of extremism and conflict than to make the world safe for democracy. If policy makers look to history for policy guidance, they would be well advised to study the lessons of Versailles rather than staying fixated on those of Munich.

Jonathan Marshall is an independent researcher living in San Anselmo, California. His last articles for Consortiumnews were “Unjust Aftermath: Post-Noriega Panama”; “The Earlier 9/11 Acts of Terror”; and Americas Earlier Embrace of Torture.

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11 comments for “Risky Blowback from Russian Sanctions

  1. Anonymous
    January 19, 2015 at 11:13 am

    If only everyone were as rational as Hollande.

  2. m s 57
    January 19, 2015 at 1:50 pm

    “Punishing Russia for its annexation of Crimea and its continuing support for Ukrainian rebels is likely to create a host of unintended and costly repercussions for the United States and Europe.”

    As will not punishing Russia…

  3. R McHewn
    January 19, 2015 at 4:32 pm

    “It’s worth remembering, with the centenniary of World War I just past, that economic collapse and social disruption are more likely to sow the seeds of extremism and conflict than to make the world safe for democracy.”

    When one looks around at what is happening – whom we support & whom we bomb – democracy has nothing to do with it: It is much more about corporate hegemony hiding behind the shield of good deeds.

  4. Mike Rizzo
    January 20, 2015 at 8:40 am

    “Punishing Russia for its annexation of Crimea and its continuing support for Ukrainian rebels . . . . . ” You can’t help yourself, can you?

  5. Joe
    January 20, 2015 at 12:49 pm

    Well my belief is that the more that the US uses sanctions as a tool against countries then eventually it will backfire. I think in the future, especially with the rise of institutions such as the BRICS Development Bank and an alternative to the SWIFT system, that we are going to see countries that were the victims of US (and western) sanctions draw closer together. I believe in 1998, it was Russia that stood strong with India when the US put sanctions on it and now India sees Russia as its’ greatest ally. China is also facing a “US pivot to Asia” so I believe it is in China’s best interest, especially as it attains the mantle of the world’s largest economy, to have a strong Russia in its’ corner. Also could Iran eventually join the BRICS or the SCO? We also have South America which has been the victim of countless US coups and suffered greatly under US backed military regimes.

    All that I think it is going to take is for the world to have an alternative to the current economic system and I think we are really going to see a shift away from a US dominated world which just seems to create conflict and death in the world that we live in today (Israel/Palestine, South Korea/North Korea, Syria, the Middle East etc.). I think the shift is already under way but we will have to see what other changes we are going to see especially as China will be the largest economy and main driving force for the world economy.

  6. onering
    January 20, 2015 at 2:13 pm

    The supranational interventionist elite in control of US government is lunatic. Since when has av. Americans had any cultural connection to Ukraine ? The “democracy”-spreading argument is a bad joke. I can’t think of one US intervention that did not end up in ruins&bloodshed.

  7. Don G.
    January 20, 2015 at 2:35 pm

    If one considers that the US/Nato deliberately started problems with Russia by convincing the Ukraine to threaten Russia’s naval base in the Crimea, then there’s little chance the US/Nato will ease up on sanctions until the goal of encroachment on Russia’s borders is accomplished.

    • Eileen K.
      January 20, 2015 at 5:12 pm

      The problem with that is, the loser here would be Ukraine, not Russia; but, apparently the USSA/NATO don’t give a hoot about the fate of Ukraine. All they care about is orchestrating regime change in Russia.
      However, they’d be in for a huge shock; as Russia and China have bonded, creating the Double Helix, which the West is unable to budge; and, China is now the world’s top economic power.

      • Benoit Laine
        January 21, 2015 at 7:12 am

        Indeed, it seems (from here in Brussels…) that the US will fight Russia down to the last Ukrainian.

  8. January 22, 2015 at 6:30 am

    Я не понимаю нобелевского “демократа” господина президента США, который радуется, что ослабил санкциями экономику РФ. Ведь он вредит этим не Путину, а оставляет в нищете народ страны, который и так живет впроголодь. разве это демократические ценности?

  9. Anonymous
    January 22, 2015 at 11:01 am

    Well, I am Russian, used to live in Ukraine. Very shoked to read UAS and Eoripean press from time to time, balming Putin and saying that we are supporting rebellians or even sent army there. In our 21 century I believe if it was like that I would facea lot of picturs from the space , saying HA you can see Russian army invention , But no Just Bla Bla Bla. Regarding suppoting rebelian… Do you thing sending food and cloth and medicin for the civil population is a crime ? Have you seen on your TV how Ukrane army is attacking civil population? how grandparents and children hide in the cold , dark basments? I believe not! Eoropean people pity tho dog of the infected hopital girl, USA people are crying about boy shutted by polismen , but the thousands of people are under attack day after day and just in the minute in Ukrane….. that “story” is not made by Russia, and not even by Ukrane , so who do you think made it up? just on the lips. Ukraine is interested as the neighbor of Russia in the matter of week place of Russia. Peolpe’s lifes and deth are not under consideration , thatis the tragic . Just the words of the USA Governmet WE ARE THE CHAMPIONS

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