Blended Sanctions and the Prospects of Indo-Russian Cooperation in Greater Eurasia

The recent Indo-Russian conference organized by Valdai Club and Observer Foundation clearly revealed that in general there is a clear consensus on sanction challenges that cooperation between two countries faces nowadays, how sanction pressure has evolved since 2014 and which measures could be implemented to counteract it. An open question where consensus is clearly needed – what we expect in a mid-term regarding sanctions and trade wars.

First, from Russian prospective we could speak about rising number of unilateral sanctions in a medium term – and less in a long-term: both direct sanctions (against Russia, Iran) and secondary sanctions for EU, Korea, China, India etc.

Second, we observe intense blending of sanctions (aimed to reach political purposes) and trade wars (aimed to get purely economic gains) as a result of aggravation of rivalry between states in less stable international system. This is not the first blending in history – like sugar embargo on Cuba was of political origin but was more than welcomed by US sugar producers – still – this blending trend makes any kind of bargaining and negotiations much more difficult.

It is fair both for sanctions – because conditions for withdrawal become unclear and for trade wars too, because it is impossible to trade national security – and that are national security issues that justify the most sensible sanctions nowadays.

Next trend that determine mid-term impact of sanctions on Indo-Russian relations is a bet on unpredictability: when mode of actions become more important than particular actions. If previously a regular sanction analysis was concentrated around conditions of lifting sanctions, nowadays, in contrast, we see intriguing announcements, like the recent by Kurt Volker «We will impose new sanctions every 2-3 months». And it creates a very negative expectations among various stakeholders of Indo-Russian cooperation and especially – among potential stakeholders.

It makes necessary from Russian side to elaborate a proactive approach instead of reactive one, a clearly formulated strategy on how to cooperate under sanctions. Otherwise it will be very hard to beat negative expectations.

As for multilateral cooperation in Greater Eurasia we have to admit that sanction factor will gradually increase its influence there. Firstly, because we observe a vacuum of global approach and solutions for interstate disputes (and SCO, RIC, NBR BRICS could make some valuable efforts to fulfill this gap). Second – because sanctions become more and more prestigious and relatively cheap: state capacity to impose unilateral sanctions increases the status on international arena. When Saudi Arabia sanctions Canada or Qatar, when routine trade dispute between Uzbekistan and Ukraine is presented in media as a risk of Uzbekistan`s sanctions – these events clearly prove that we see that sanctions become a «new black» in political fashion trends.

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However international environment in 5-10 years will be defined not only by sanction influence but also by counter-sanction policies of numerous states. We will see more options to compensate negative sanction effects, in particular through a comprehensive diversification of international system:

  • In finance: capital markets will be more fragmented, more currency swops will appear, new payment instruments and systems will be set

  • In technologies: new solutions for quick and cheap localization of production capacities for example will be invented, new techno-hubs to minimize technological sanctions will be developed, and more intermediaries will maintain value-added chains.

  • In trade: new trade routes will be built, new substitutes for traditional commodities – even energy markets will appear and become cheaper.

So in «after sanctions» era we will see less ruins, less trust - and higher costs of international cooperation. Due to diversification options it will be less probable that sanctions could cause really devastating effects on sanctioned economies (if they ever really did without military support).

A permanent risk of sanctions will continue to decrease the level of trust and demotivate countries to launch joint long-term projects even when sanctions are lifted. A decreased level of trust itself leads to higher costs of hedging (for example: instead of one global currency – many currency swops). In general, international system becomes more dynamic, more mosaic and less coherent.

For Russia and India it has very clear implications for bilateral cooperation. Mostly on arms supplies and energy sector. And we have to admit that most of the solutions in this field could be found  only in the field of high-level political bargaining (like waivers) and sanction hedge strategies for particular organizations (no use of dollar, specially designed intermediaries etc.).

As for implications for Russia, India and other counties in Greater Eurasia, especially Iran, US sanction policy will increase risks for joint projects in Eurasia: energy and infrastructure projects, international transport corridor North-South. And this field demands for flexible and dynamic solutions.

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A truly sensitive blow would be  the transfer of a number of Russian companies from sectoral lists (SSI) to the SDN list. However, there are risks for both the Americans themselves and their partners. If Russian-American relations neither worsen nor improve, such a step is unlikely to be in demand.
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© 2019 Alex Brandon/AP

First, we have to admit that it is impossible to find the perfect counter sanction option in 2019 and enjoy it for ages.

Possible solutions could be elaborated within negotiations free trade zones in Eurasia – EAEU has signed temporary FTA with Iran, negotiates it with India. It provides some opportunity to discuss flexible solutions to facilitate trade, hedge foreign exchange risks

Second, national currency exchange within multilateral formats – like Russia-Iran and India opens door for easier adjustment  of trade and foreign exchange balances

Third, complex Compliance solutions for S&M business could be on a high demand in many countries. Serious compliance is too expensive for S&M business and some «compliance package» sponsored by business associations of export supporting agencies could play a decisive role in the playground of business expectations.

Finally, diversification of value-added chains with more beneficiaries could provide more sustainability of the projects in Greater Eurasia – the case of Nord Stream II clearly illustrates it.

Good news are that international sanction experience proves that when you start to blend sanctions and trade wars, so you want to simultaneously reach foreign policy goals and make some good fortune due to trade wars – you probably lose on both tracks.

Tuning of national priorities in contrast leads to more successful policy. So for Russia and India today is extremely important to tune their priorities and then adjust sanction-resistant solutions.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.