Are economic sanctions against Russia working?
The in-depth study by Giuseppe Liturri
Another week has passed waiting for the Commission to announce the content of the sixth sanctions package on Russia. There are many and too many difficulties to overcome in order to allow Ursula Von Der Leyen's technicians to bring to the negotiating table a proposal that satisfies all 27 Member States.
EU diplomatic sources told the Financial Times that, at best, everything is postponed until next week and talks are still in their infancy. The most concrete working hypothesis circulating between Washington and Brussels – a predetermined ceiling on the price of Russian oil, considerably lower than the current market level, imposed by the EU – has been ditched by Germany.
It was the scenario illustrated in the Corriere della Sera by Federico Fubini whose key to success lies in the role of "sheriff" that the Biden administration should play. Since the group of 37 advanced economies that have imposed the sanctions is certainly relevant but covers only 55% of world GDP, there is a high probability that there will be countries around the world that will want to buy Russian crude, not respecting the controlled price. imposed by this international cartel. At that point, the sanctioning power of the USA would intervene and impose second-level sanctions – consisting in the exclusion from business with the rich American market – aimed at subjects who become complicit in circumventing the ceiling.
The skepticism of the Germans focused on the difficulty of setting a price threshold which, in any case, would be a clear breach of contract. The aspect of the substantial subordination of the effectiveness of a political choice by the EU to the deterrence capacity of US sanctions should not be overlooked. A full-blown admission of powerlessness, in the absence of the iron fist of the overseas ally, which is not very welcome in many European capitals.
So, instead of climbing steep paths, the German Vice-Chancellor Robert Habeck on a visit to Warsaw, announced that Germany has already reduced its dependence on Russian oil from 35% to 12% of its needs and is on track to complete independence. which could arrive in days. The German line of defense has long been attested to the request for a gradual approach to oil purchases and no concessions on the gas front, whose embargo for Berlin is beyond question. Also because Russian oil accounts for 25% of EU purchases, while gas is 45%, with Germany on even higher levels.
The aim of all this prolonged turmoil – about which we have been questioning and raising doubts for some time – is neither to end the war in Ukraine nor to provoke discontent leading to the overthrow of Putin's regime. With sanctions, the war does not stop. We don't say so, but Nicholas Mulder, history professor at Cornell University, paper and author certainly not accused of philoputinism, writes it in the Wall Street Journal .
Mulder points out that President Joe Biden's policy – that the damage done by economic sanctions against Russia rivaled that done by military force – was unsuccessful. Russia is no ordinary "rogue" state. It is a G-20 economy strongly interconnected with the rest of the world against which sanctions, whatever happens, are a weapon of attrition rather than deterrence. In the 1920s, sanctions frightened small states like Greece and Yugoslavia, but they did not frighten the Japanese imperial power and the Italian fascist regime. Size matters, and " if the goal is to paralyze a country rich in natural resources and with a large army, such as Russia, then sanctions are of limited use ."
After two months of war, in Brussels they are bitterly acknowledging the existence of a dry alternative between sanctions and weapons, which they initially believed to be replaceable. War is still fought with the latter, Mulder points out.
Those who impose sanctions must also take into account the setbacks and Mulder points out how many African, South American and Asian countries are reluctant because they cannot afford to run out of Russian wheat, copper and oil, and then it is necessary that the US and the EU undertake to mitigate the economic shock for those countries.
Mulder notes that the sanctions will come in handy as a counterpart for concessions during the peace negotiations. In this case, however, it must be considered that it is true that there are $ 400 billion of Russian central bank assets frozen, but it is equally true that there are $ 446 billion of foreign direct investment in Russia and another 120 billion of financial investments, which Putin could nationalize in a moment.
A war fought with these weapons could condition relations with Moscow for many years to come and eventually the Western powers should not only rebuild Ukraine, but also a Russia destroyed by sanctions but ready to reconnect with the West.
Far-sighted diplomacy is needed, concludes Mulder, because " it will take months, if not more, to feel the damage caused by the sanctions."
In the meantime, we have arrived at the moment of reckoning to find out the effectiveness of the sanctions already adopted and the EU is mired in the middle of the ford with reference to the story of the payment of Russian gas in rubles which, in the last 48 hours, has suffered a sudden acceleration. First the interruption of supplies to Poland and Bulgaria. Then the declared willingness of some important importing companies to follow the payment instructions issued by the Putin government on March 31st. Finally, on Friday, the stance taken by Commission spokesman Eric Mamer who ruled out any possibility of joining the gas payment scheme in favor of Gazprom.
When Bloomberg reported that 4 importers had already paid in rubles and that 10 had already opened their account in rubles, with our Eni, the German Uniper and the Austrian OVM preparing to do so, the bell must have gone off in Brussels. alarm. After only last Friday the Commission published guidelines which, with important distinctions, admitted that payments made according to the Kremlin procedure did not violate the prohibitions imposed by sanctions, yesterday they realized that the situation was getting out of hand and there was a need to clarify what was obviously not clear.
It must not deceive the blocking of supplies to Poland and Bulgaria, which occurred due to the failure to use the new procedure. In fact, both countries had their contracts with Gazprom expiring on 31 December and had equipped themselves in time with alternatives and the Russian decision had more the character of a demonstration action. The real game will be played in the coming weeks with importers based in Germany, Turkey, Italy, France and Austria, in order Gazprom's largest customers. In the second half of May, important payments are expected that must be made according to the new rules, otherwise Russia will turn off the taps.
The scheme proposed by Moscow is ingenious and aims, on the one hand, to evade sanctions and, on the other, to break the unity between the member states. The whole story revolves around the answer to a single question: is the payment of the EU importer to be considered made in foreign currency or rubles? It seems a question of goat's wool, but the answer could lead to the blocking of gas shipments to the EU, which the Financial Times defines as "catastrophic". The importer is required to open two special “K” accounts at Gazprombank in Switzerland, one denominated in euros or dollars (the contractually stipulated payment currency), the other in rubles. It is true that the importer pays in euros or dollars when making the transfer to the account opened at Gazprombank, but those funds are then converted into rubles in counterpart of the Russian Central Bank, with which it is forbidden to have exchanges, and end up in a second account. which is always legally attributable to the buyer. Only in this second moment does the transfer to Gazprom start.
The Commission yesterday entered with a straight leg on precisely this mechanism. Until Friday it seemed that he was satisfied with the declaration by the importer who considered himself released upon payment of euros or dollars, disinterested in what happened afterwards. Today they realized that opening a second account in rubles, following the procedure imposed by Putin, results in a clear circumvention of the sanctions. Indeed, the mere fact of " opening a ruble account with Gazprombank and complying with Putin's decree constitutes a violation of the sanctions " categorically declared Mamer. Which underlined the responsibility of the Member States which could be subject to an infringement procedure if they did not take steps to enforce compliance with the sanctions.
The markets are not exactly convinced that the EU will go all the way in preventing importing companies from making payments under the new procedure and therefore have not shown particular nervousness.
But the time for verbal stunts is now up and the substance counts. Of the two, one: either they pay for gas from the EU with that scheme, effectively nullifying the sanctions, or Gazprom cuts off supplies. If the Russians get rubles, the sanctions are ineffective, and if they don't get rubles, the gas stops. Purely and simply. Ursula Von der Leyen's technicians took a few days to understand that it is not enough to declare to pay in foreign currency, if rubles arrive in Moscow anyway. And we want to avoid this result, we must give up Russian gas and take responsibility for it with all the inevitable tensions on gas and oil prices. A few months of tension were enough to overturn the sign of our trade balance with foreign countries, which in February went into a deficit of 0.4 billion, against a surplus of 5.3 billion in February 2021 (41 billion against 68, observing 12 months ).
Once again, everything revolves around the quantification of costs and the distribution to households and businesses. Better to ponder carefully, because the war waged with sanctions is long and does not replace the war with weapons, as they had wanted us to believe.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/stanno-funzionando-le-sanzioni-economiche-contro-la-russia/ on Sat, 30 Apr 2022 06:33:25 +0000.