4 February 2015

Sanctions on Russia are self-defeating in a globalised economy


Last week European Union foreign ministers renewed existing economic sanctions against Russia until September. Although the initially recalcitrant Greek government fell into line with other EU member states, a decision on increased sanctions was postponed and Greece is likely to remain something of a loose cannon, using collaboration in anti-Russian measures as a bargaining card in its poker game with the Eurozone over debt reduction. The US, Canada and Australia have also imposed sanctions on Russia in response to the crisis in Ukraine.

Economic sanctions are generally perceived as a useful weapon by which developed nations with large economies can impose their will without incurring the hazards and expense of war. This notion has acquired near-universal orthodoxy in recent years. After the costs incurred in blood and treasure during the Iraq War and Western involvement in Afghanistan and elsewhere, a degree of war weariness has possessed the electorates of Western democracies. There is no evading a hot war against jihadist terrorism, but economic sanctions are seen as an ideal compromise when addressing more conventional geopolitical confrontations.

This may be a dangerous delusion. Historically, the United States was the power that favoured economic sanctions as a policy weapon: as an armchair exercise it suited America’s instinctive isolationism and its growing economic power. The great exponent of economic sanctions was Woodrow Wilson, the US president with the most inept record in foreign policy and the real progenitor of the Third Reich, rather than Adolf Hitler. “Apply this economic, peaceful, silent, deadly remedy,” claimed Wilson, “and there will be no need for force.”

But economic sanctions have always been a double-edged sword, even in the days when they were partially effective. Their effectiveness, however, has shrunk dramatically. Research by the Peterson Institute for International Economics in 1997 showed that, in instances where the United States imposed economic sanctions in partnership with other nations, between 1945 and 1970 they were successful in 16 cases and failed in 14 – a success rate of 53 per cent. Between 1970 and 1990, when sanctions were applied more prolifically, they succeeded in 10 instances and failed in 38, reducing the success rate to 21 per cent.

Unilateral US sanctions had a high success rate of 69 per cent between 1945 and 1970, tumbling to 13 per cent in the period 1970-90. The term ‘success’, of course, reflects only the achievement of a political objective. In economic terms they carry a cost. Further research by the Peterson Institute led them to conclude that in 1995 economic sanctions cost the United States between $15bn and $19bn, besides the loss of more than 200,000 jobs in the export sector. Granted, the US economy could absorb a loss like that in 1995, but does the same apply to the ailing Eurozone today?

Britain should have grown sceptical regarding economic sanctions after its experience of boycotting the UDI government of Ian Smith in Rhodesia. It simply motivated the rebel government to develop an unimagined self-sufficiency in the Rhodesian economy: the only reason Zimbabwe today is not enjoying that legacy is the demented policies of Robert Mugabe.

Today, sanctions against Russia are probably the most counterproductive ever launched, in view of the perilous state of the Eurozone and the globalised nature of the world economy. In 2015 the EU and its core component the Eurozone desperately need as much economic expansion as they can contrive. Instead, they are using their fragile economy as a weapon of war – at the behest of politicians.

Yet the reality is that Russia is the European Union’s third largest commercial partner and the EU, reciprocally, is Russia’s chief trade partner. Who thought it was a good idea to subvert this arrangement? Not an economist or a businessman, we may be sure. Figures published by Francesco Giumelli in the journal of the Italian Institute for International Affairs show that before political disruption intervened, in 2013, EU-Russia trade totalled more than €326bn. Russia invested about €8bn in the EU that year. There is a kamikaze flavour to EU politicians endangering such an economic relationship.

That impression intensifies when we see that German chancellor Angela Merkel is the most vociferous proponent of sanctions despite the fact her country enjoys the biggest slice of business with Russia, totalling €75bn. Other EU states sawing off the branch on which they are sitting are the Netherlands (€37bn of trade), near-basket case Italy (€30bn) and Poland – admittedly with strong geopolitical motivations – (€26bn).

Several eastern European leaders have denounced the irresponsibility of sanctions, including the Slovak prime minister Robert Fico, who called them “meaningless”, Czech president Milos Zeman who said they will not work but will harm economic relations and, most outspokenly, Hungarian prime minister Viktor Orban. Russia is Hungary’s largest trading partner outside the EU; Hungarian exports to Russia totalled €2.55bn in 2013. The sanctions policy, Orban said, “causes more harm to us than to Russia. In politics, this is called shooting oneself in the foot.”

Russia will not weaken under sanctions. The more Western rhetoric provokes Muscovite resentment, the more the population will invoke the spirit of 1812 and 1941. Russians know how to endure to defend their national interest and they are less accustomed to a pampered lifestyle than their Western counterparts. The ostensible justification for sanctions is the “annexation” of the Crimea, which was embraced in a referendum by an overwhelming majority of its population. Is it Western policy to force Crimeans to return to Ukrainian rule, which they reject?

But the chief peril of sanctions today is unquantifiable. It lurks in the immediacy of economic consequences within a globalised economy, the incalculable domino effect of sovereign debts turning rancid and currencies failing. It beggars belief that supposedly economically literate politicians and commentators are gloating over the plight of the rouble – arguably more due to tumbling oil prices, but at least aggravated by sanctions – when the euro and much of the world banking system is on a life support system. Economic sanctions have the same credibility as poisoning the public water supply in the hope of killing some enemies. Sanctions are not a weapon that can responsibly be used in a globalised economy.

This article is an exclusive for CapX, and is available for syndication. Please contact Rachel Cunliffe at [email protected] to discuss details.

Gerald Warner is a political commentator and writer.