Ukraine crisis: Targeted sanctions are a blow to Russia

For all the bravado from Moscow, the chances are that Russia's already troubled economy will be damaged

While America and her allies will not use force, they will strike against the personal interests of powerful figures around Vladimir Putin Photo: Alexey Druzhinin/ Getty

By David Blair

8:01PM BST 29 Apr 2014

263 Comments

Disrupting the lives of the rich and privileged has become the unlikely centrepiece of the West’s response to President Vladimir Putin’s intervention in Ukraine.

Another 15 Russian officials were placed on a European Union sanctions list on Tuesday, banning them from visiting any member state and freezing any assets they may hold. The previous day, seven Russians received the same treatment from the US, including Igor Sechin, the chairman of Rosneft, the biggest traded oil company in the world.

These “targeted sanctions” are designed to exact a price for Mr Putin’s actions in Ukraine. While America and her allies will not use force, they will strike against the personal interests of powerful figures around Mr Putin.

But do measures of this kind have any real impact? Suppose the individuals concerned have no assets in Western banks – and no great interest in holidaying in New York, Paris or London? Any influential Russian worth his salt will, after all, have known for months that sanctions were a strong possibility. Will they not have moved vulnerable assets beyond reach? Is this anything more than foreign policy by gesture?

The answer is that sanctions of this kind can and do hurt. For all the bravado from Moscow, the chances are that Russia’s already troubled economy will also be damaged.

The first point is that the new restrictions will be damaging even if their targets hold no assets in Western banks. Every significant bank in the world conducts business with the US and the EU. That means they will have to apply these sanctions or risk large fines from American or European regulators.

So the Russians singled out for punishment now bear the financial version of the mark of Cain. Every bank in the world will have to think twice before touching them. That will make it difficult for the targets to buy property or hold assets just about anywhere, not simply in Europe or America.

And there could be more to come. Both the US and the EU have made clear that more Russians are likely to be singled out. Any international bank will have to consider carefully before accepting the custom of any Russian who might end up on a sanctions list.

Then there is the possibility of America and the EU going a step further and punishing the vital sectors of Russia’s economy. On Monday, a senior US official said these “very robust” measures “will be imposed” if Russia were to invade Ukraine. The targets would be Russia’s energy and banking industries, he added.

If the situation escalates to that stage, then Europe and the US would also start to pay a price. Punishing individual Russians is a largely cost-free exercise for the West – after all, the Kremlin has little room for retaliation for the simple reason that not many Americans or Europeans hold assets or own homes in Moscow.

Striking the Russian energy industry would be a very different proposition. The essential facts are that the EU buys about a quarter of its gas from Russia - and the country is also the world’s biggest oil producer. An embargo on Russian energy exports would cause a string of European countries to lose their gas supplies, while attaching a booster rocket to the oil price.

With these grave risks in mind, the Western powers are holding back from imposing these measures. If Russia actually starts a new European war by invading Ukraine, however, then all bets would be off. Under that extreme scenario, it’s possible to see how Europe and the US could impose an embargo on Russian energy and suffer far less than their target.

The first reason is simple: just as Arthur Scargill made the cardinal error of calling a miners’ strike in spring, so Mr Putin has begun threatening Ukraine at the wrong time of year. In summer, Europe buys very little gas from Russia. If supplies were to be cut off in the next few weeks, the EU would have a vital breathing space to adapt existing infrastructure to supply the most vulnerable countries by the onset of winter.

The pressure placed on the Kremlin, meanwhile, would be severe and immediate. Oil and gas account for two thirds of Russia’s export earnings, with the EU serving as by far the biggest customer. Russia needs to sell and Europe needs to buy, creating a situation of mutual interdependence. But, in the final analysis, Russia needs to sell that little bit more.

For all Mr Putin’s bombast, the harsh truth is that he leads a country with an Italy-sized economy. Russia, the biggest nation on earth with a population more than twice the size of the UK, has an economy 20 per cent smaller than Britain’s – and barely a tenth of the size of America’s.

In the end, if the rich world gangs up on a country playing in the Italy league of global economies, then there are no prizes for guessing who will lose more.

The markets already appear to be factoring in this possibility. Russian 10-year bond yields are 9.7 per cent – higher than those of Greece or Portugal. Moscow recently had to cancel some bond auctions because there were not enough takers. Meanwhile, Standard and Poor’s has downgraded Russian debt to one notch above junk status.

And that is before any sanctions on the country’s economy – as opposed to on individuals – have actually been imposed. Just the prospect has already caused significant damage. If these measures were actually to follow, then Russia would be acutely vulnerable.

This might help to explain why, so far, Mr Putin has held back from invading Ukraine in the classical sense by sending tanks over its border. Instead, he has chosen subversion from within as the best way of achieving his goals. In itself, that amounts to evidence that he is fully aware that the penalties of escalation would go well beyond disrupting the lives of his well-heeled colleagues.