Russia sanctions: what comes next?
After a major stumble, which saw separatist forces capture the strategically important transport hub of Debaltseve, the Minsk II ceasefire agreement in Eastern Ukraine appears to be holding.
The definition of “holding”, in the context of the current conflict, must be interpreted loosely. Despite the ceasefire, there are ongoing reports of intermittent shelling, light arms fire and casualties on both sides of the conflict. EU and US leaders seem prepared to overlook the pro-Russian assault on Debaltseve, as long as the separatists make no further attempts to expand their territory. Few, however, seem to think that we have seen the last of the fighting, and Western leaders have repeated threats of fresh sanctions against Russia, particularly if the fighting escalates once again. EU leaders meet on 19 March 2015, when they will decide whether to extend existing sanctions, or introduce new ones.
The French foreign minister, Laurent Fabius, has warned Russia of increased sanctions if the large coastal city of Mariupol comes under attack. This is something local Ukrainian forces are becoming increasingly afraid of despite an apparent lull in fighting. The Ukrainian army has reported a build-up of separatist troops and weapons in recent weeks, with many suspecting that Russia wants to create a land corridor between the rebel-held areas of Donetsk and the Crimea. US Secretary of State John Kerry and UK Prime Minister David Cameron have made it clear that a pro-Russian assault on Mariupol would be a step too far, with the latter saying that a separatist advance on Mariupol or elsewhere “will be met with significant further EU and US sanctions”.
Additional sanctions could also be imposed on Russia if the West suspects it of trying to destabilise other areas of Ukraine, such as Kharkhiv or Odessa (both majority Russian-speaking). These towns have been the victim of several terrorist attacks in recent weeks, the perpetrators of which are unclear. Certain hawkish members of the Russian administration, notably Dmitry Rogozin and Igor Sechin, are said to be championing the idea of seizing Mariupol, and are reported to have set their sights on Odessa and Kherson – although these are a significant distance from the current conflict zone.
So what or who would any future sanctions target? And, more importantly, would they be any more successful than the previous sanctions?
Current sanctions by the US and EU have focused on specific individuals and companies – future sanctions may be broader in scope, in order to enact greater damages on the flagging Russian economy. On 24 February 2015, David Cameron, who has taken a tougher stance than many other European leaders, said that the EU should consider sanctioning entire sectors of the Russian economy if the current truce in Ukraine fails. One obvious target would be the huge Russian energy sector, which has not yet been completely stifled by existing sanctions.
On 28 February 2015, the British government tried to block the acquisition of North Sea oil and gas fields from the German energy company RWE by Mikhail Fridman’s LetterOne Group, citing concerns that either the Russian oligarch or his companies could be sanctioned in the near future. Britain’s response may reflect sanctions-related discussions it is having with its European partners: targeting influential oligarchs or the energy sector is likely to be on the table. Alternatively, Britain’s reaction may represent a growing concern over London’s role in the international money laundering system of the Russian elite.
Another option for future sanctions may involve cutting off Russia from the SWIFT banking system, as has previously happened to Iran. SWIFT is based in Belgium and is therefore subject to EU law. This would make it very difficult for Russian banks and their customers to send and receive money internationally, and would cause huge damage to trade and investment. Although this option was rejected by the EU when David Cameron raised the idea in August 2014, a SWIFT ban appears to still be a popular option with several EU states. On 23 February 2015, Grzegorz Gshetyna, Poland’s Minister of Foreign Affairs, stated that the EU was considering SWIFT sanctions as an option. On the following day, David Cameron also stated that Russia could be barred from SWIFT if the current truce failed to hold. Germany is known to be more cautious about a ban. On 27 February 2015, the Russian Prime Minister, Dmitry Medvedev, vowed an “unrestricted” response if the country was cut off from the SWIFT system, something emphasised by the head of VTB Bank who stated in January that such an action would lead Russia and the US to “the brink of war”.
At present, it seems that the US and EU are wary of taking the drastic step of enacting SWIFT sanctions. However, this could change very quickly if the situation in Eastern Ukraine was to escalate. Another option in a similar vein, which is favoured by the US, is to cut one or more Russian banks out of the global financial system. Under this scenario, it is likely that existing sanctions would be extended against Bank Rossiya or VTB Bank, both of which are considered to be closely tied to President Putin. If, however, pro-Russian separatists did continue to expand their territory in spite of serious sanctions such as a ban on SWIFT, what other sanctions could the West impose on Russia? The options seem limited. A ban on importing Russian oil and gas could be implemented, but this would cause a great deal of self harm, particularly to the EU, which is heavily reliant on Russian gas.
It seems unlikely that fresh sanctions would be more successful than previous rounds in changing the Kremlin’s stance on Ukraine. If the West was to attempt to impose a SWIFT ban on Russia, the Russian economy would undoubtedly suffer. However, it is likely that this would only galvanise the country further behind President Putin, who still enjoys enormous popularity. It would also lend further credibility to his patriotic narrative of Russian encirclement, Novorossiya and a CIA-sponsored “Fifth Column”. The fate of the Russian elite is bound to Putin, just as he is bound to the state television’s fanciful portrayal of what has happened in Ukraine. Neither can backtrack or show doubt. In this situation, further sanctions can only lead to increased Russian aggression and isolation. The best the West can hope for is that Russia decides to quit while it is ahead, satisfied with its control of the Crimea and de-facto control over the resource rich region of the Donbass. This seems to offer a much better chance of peace than the unpredictable effect of further sanctions.