After four years of Western sanctions, Russia digs in for long haul

Russians have been living under Western sanctions for four years now, and they have undeniably survived.

But the debate now unfolding in Russia's parliament, and its expert community at large, seems to be no longer about how to manage the temporary burden of sanctions. Rather, it seems to be about how to adjust to permanent life without any hope of achieving broad integration with the West.

Anti-Russia sanctions appeared to be a straightforward admonition four years ago, when Russia annexed Crimea and intervened to back Ukrainian rebels in their war against the new Kiev government. The message to Moscow conveyed by the first rounds of sanctions was: Correct these specific behaviors and we'll discuss removing the sanctions. Russia, of course, did not comply, and even levied its own counter-measures.

But the most recent round of US sanctions, and further ones under discussion, appear unconnected to any specific actions taken by the Kremlin. Rather, they seem to be intended to pillory Russia for generalized “malign activity” that has not been shown to have been carried out by the Russian state, such as interference in the 2016 US election or its alleged involvement in the Skripal poisoning.

This week the State Duma, Russia's lower house of parliament, responded with a long-term “counter-sanctions” law, as well as another bill under preparation which would criminalize fence-sitting on the part of Russian banks and companies. The pair suggests that the Kremlin is finally getting serious about forcing all its citizens to choose sides in what is shaping up to be a very long struggle.

“There is no point in looking for an answer that will satisfy the West. It's obvious now that sanctions are forever,” says Mikhail Delyagin, director of the independent Institute of Globalization Problems in Moscow. “If it means that we have to look for new rules of international relations in order to adapt, then so be it. We are facing a whole new reality.”

Digging in for the long haul

The first draft of the Duma “counter-sanctions” bill included retaliatory measures such as banning exports of Russian titanium, rocket engines, and nuclear materials, and imports of critical items like American pharmaceuticals. That would certainly inflict pain on some US industries – Boeing relies on Russia for about 40 percent of its titanium.

But it would hurt Russian companies more. Critics lambasted this approach as “bombing Voronezh,” or punishing Russians in order to demonstrate defiance against Washington. Most of those measures have been stripped from the bill, which will go through its third and final reading in the next few days.

“Russia cannot leave the [US sanctions] unanswered,” says Pyotr Tolstoy, deputy chair of the Duma and an author of the new law. “We didn't want something that would be just symbolic, or would do harm to Russia's economy. In this war of mutual restrictions in trade and cooperation, we need to take counter-measures. But this draft law ... give[s] the president and government maximum flexibility in limiting the activity of companies that have American assets, or constraining their opportunities to participate in privatization deals....”

Mr. Tolstoy says the Duma is also looking at the second law to compel all Russians to put their own country's interests first, by preventing Russian enterprises from declining to provide certain goods and services to sanctioned Russian entities in order to avoid the attention of US authorities.

But critics warn such a law may lead the US to spread their sanctions much more widely across the Russian economy, far beyond the approximately 400 Russian companies and 200 individuals who are already on US sanction lists.

“Say you've got a Russian bank or company that is avoiding sanctions by holding back services from Russian entities that are sanctioned. Now they need to provide that service, or face being sued by the Russian government,” says Anton Pomino, director of the Russian branch of Transparency International, a global anti-corruption watchdog. “A lot of businesses are expressing alarm at this measure, because it will finally make the sanctions bite deeply into the Russian economy, and maybe make them work.”

There is some dispute about the toll that joint Western sanctions have so far exacted from the Russian economy. Most experts say that around 1 to 2 percent was shaved from annual Russian GDP over the past four years. Blocking Russian access to Western high technology and financial markets may have serious consequences for Russian industrial development down the road, experts say.

“Our economy survived, it didn't go to pieces,” says Igor Nikolaev, director of the Institute of Strategic Analysis, founded by FBK, a leading Moscow financial consultancy. “It is, after all, a market economy. Even if it has a specific character of being state-led and monopolistic, it is flexible and adaptable. [But] we've paid a price in growth for the sanctions, and we face continued uncertainty. Now we hope for economic reforms, to pull us out of stagnation.”

One thing Russian leaders will have to take into account is the apparent rise in public alarm over the prospect of living amid a permanent schism with the West. A poll released this week by the independent Levada Center in Moscow found that 56 percent of Russians believe their country is “internationally isolated,” up 10 percent from a year earlier. The number of those who say they are “concerned” by the growing isolation jumped to 37 percent from 25 percent over the same period.

A wider sanctions war to come?

No one knows what impact the new US sanctions will have. For one thing, they appear to be less well thought-out than previous ones, and more likely to inflict unintended collateral damage.

A case in point was the US Treasury Department's attempt to sanction the Russian aluminum giant Rusal, whose main owner is Kremlin-connected oligarch Oleg Deripaska. But Rusal is embedded in global supply chains, and the pain was felt from Australia to Ireland, causing Treasury Secretary Steve Mnuchin to quickly backtrack. “Rusal has approached us to petition for delisting,” he told journalists last month. “Given the impact on our partners and allies, we are issuing a general license extending the maintenance and wind-down period while we consider Rusal's petition.”

For another, with its withdrawal from the internationally backed Iran nuclear accord, the US seems to be gearing up to wage a much wider sanctions war that will directly harm European allies who want to maintain the deal. That could create opportunities for Russia, which also supports the deal, to make common cause with Europeans and, perhaps, win some sanctions relief for itself in the process.

“By levying sanctions in such a promiscuous way, the Trump administration is basically undermining the existing global economic order,” says Fyodor Lukyanov, editor of Russia in Global Affairs, a leading Moscow foreign policy journal. “When Trump threatens the European Union with sanctions [if it doesn't stop doing business with Iran], he's threatening institutions that have been built up over recent decades. It's hard to guess how this will play out.

“Russia is a tiny part of the global economy, and cannot affect any of this directly. But it does create interesting new opportunities, even if they are not Russia-driven. Moscow may hope that other big economic players will need to draft new approaches, and we may find ourselves playing a cooperative role in that.”