Sanctions, no matter how they are presented, strengthen hardliners who want to position themselves as builders of independent sovereign states. In the short term, they will stir up passions. Russians are ready to support their leaders in this difficult period of confrontation with the outside world.
Free trade – by which I mean minimal customs duties and trade restrictions, and the free flow of cash and capital across borders, i.e. everything that now seems completely normal in economic relations between countries – is a fairly recent development from a historical perspective. This economic system took shape after World War II, and the rules of the game were dictated by the victorious Western countries, above all the United States.
In the Soviet Union, these standards were regarded as “imperialist diktat.” Soviet experts regarded international relations in general and economic relations in particular as a zero-sum game, where one side’s gain necessarily resulted in a loss for the other.
Russian soil was not fertile ground for the underlying logic of business – that cooperation makes everyone richer, and economic growth is what every country wants and needs to continue to develop. In Soviet times, trade deals, like exchanging gas for pipes, were considered a temporary ploy to obtain additional resources or to gain some breathing room to increase domestic capacity. No one at the time could have imagined that oil and gas exports to the European Union would form the basis of the Russian economy and provide more than half of federal revenue for decades.
It would seem that Russia has changed drastically since the revolutionary events of 1991-1993, and is now committed to a market economy based on private enterprise. For example, Russia now belongs to the WTO. However, the mentality that regards economic and trade relations with foreign countries as some sort of a concession lives on. And this old way of thinking has proved difficult to dislodge among government officials and the Russian public.
I believe that’s why Russian leaders were so willing, even eager, to impose all sorts of restrictions on trade and foreign business in our country. The free market hasn’t become a strong, self-sustaining value in Russian domestic or foreign policy.
This does not mean that the old way of thinking and the Cold War approaches are confined entirely to the Russian expert community and bureaucracy. The EU's Eastern Partnership was conceived as a zero-sum game. Polish and Swedish diplomats, as well as representatives of the EU and the USA who toured the Maidan in Kiev, played up the anti-Russian side of their pro-European project. This is typical in geopolitics, but the economy operates under a different set of rules.
The privileging of politics over the economy may be unavoidable in the short term, especially during periods of political crisis. However, in the long term, neglect of the economy and the attendant social consequences always catch up to countries.
As a rapidly growing, globally competitive economy is the only solid foundation on which to build up Russia’s prestige in the world, a cautious approach to international economic cooperation is called for.
A foreign policy that aggressively promotes national interests at the expense of economic growth, technological modernization and the competitiveness of Russian businesses on global markets is at odds with Russia’s real interests.
In order to continuously upgrade Russia’s production profile, it won’t be enough to have Russian banks and companies working on global markets; the Russian economy needs foreign high-tech investors and greater integration into transnational production chains. China has demonstrated this point quite convincingly. However, the majority of Russian elites don’t have the right priorities for Russia’s foreign policy, and this can lead to major errors in judgment.
The argument that economic sanctions provide effective leverage in foreign policy is flawed. In most cases, economic sanctions are how some countries express their frustration with other countries. It’s a way of giving a bad grade to an opponent. Sanctions are used when “something has to be done” but military threats or direct intervention would be too dangerous. In this sense, choosing economic weapons over military weapons is justified.
However, sanctions rarely lead to a change in system of government. Cuba, North Korea and Iran have been living under sanctions for decades without experiencing much political change. Sanctions rarely result in concrete concessions, though it is not unprecedented. For example, Muammar Gaddafi was compelled to extradite suspected Libyan perpetrators of a terrorist attack to the UK for prosecution.
Of course, this is not to suggest that sanctions don’t inflict economic damage in a longer perspective. Being cut off from the global economy has slowed growth and taken a heavy toll on living standards in countries living under sanctions. Comparing the history of economic development in South and North Korea over the past 60 years shows that, all else being equal, an isolated country will always lag behind a country that is plugged into the global economy.
Economic relations in the post-Soviet space have followed similar rules. Tensions with a neighboring country are inevitably accompanied by mutual restrictions on trade and investment. Russian leaders tend to show a degree of diplomatic caution when making their case for such actions. Instead of sanctions, they talk about violations of sanitary standards (as was with case with Georgian wine, Ukrainian vegetable oil and chocolate and Moldovan fruit) or disputes between economic actors (gas supplies to Ukraine in 2009 and 2011).
However, these measures did not have the desired political effect. Sanctions, no matter how they are presented, strengthen hardliners who want to position themselves as builders of independent sovereign states.
The EU’s eastward expansion is a separate issue – one that has been a source of contention both for the senior members of this integration union and for junior members from the European periphery. As I see it, the desire of “old EU” leaders to expand is another manifestation of the old way of thinking about international affairs.
The EU’s geographical expansion was regarded as an unqualified success, even though it added nothing to the EU economically, just as NATO’s eastward expansion hasn’t improved the security of the senior members of the Alliance. However, the risks and responsibilities of the EU have increased significantly, resulting in a two- or even three-tier community in Europe. The troubled Greek economy more closely resembles its Balkan neighbors than Northern Europe. The entire southern periphery, including veteran EU members, is currently unable to convince the North to relax restrictions on the movement of labor and has no clue what to do with the influx of illegal immigrants from the opposite shore of the Mediterranean Sea. Most of these countries are unable to meet the financial metrics of the Maastricht Treaty, etc.
Since joining the EU and NATO, the “new” Europeans have resolved some of their political problems. They have drawn a tangible, durable dividing line between themselves and the countries of the former Soviet Union. The bulk of the population in Eastern European countries accepted that economic sacrifices were necessary to join the European political community. The shipyard in Gdansk, the birthplace of the Solidarity movement, went belly up in the face of economic competition. But this did not lead to social unrest. Building a new world order and breaking free of communism proved to be more important to these societies than structural economic issues.
This provides import context for understanding not only the Maidan revolution, but the last 20 years of Ukrainian history. Judging by the data available to me, including from long-standing personal contacts, Ukrainian society has been living all these years in expectation of a miracle.
Initially, the miracle of prosperity was supposed to flow naturally from independence. The miracle failed to materialize. Today, Ukraine is no more developed than it was in the twilight of the Soviet Union. Ukrainians started looking for someone to blame, and they set their sights on Russia. Ukrainian elites began to promise the people that the Eastern Partnership program and the association agreement with the EU would bring the miracle closer. Others argued that Russia and the Customs Union were the answer. Unlike other Eastern European countries, no one in Ukraine is discussing the tradeoff of economic benefits and sacrifices, or analyzing possible scenarios for the future. All politicians are simply making populist promises that the miracle will happen by itself.
Meanwhile, the country had descended into financial and economic calamity. As such, no matter what political forces come to power in Ukraine, the country faces a challenging period of economic recovery and painful restructuring. There will be no miracle, only hard work.
The Ukrainian authorities have negotiated several financial stabilization packages with the IMF, but nothing has been finalized and no financial assistance has been disbursed. A similar program was recently proposed to the Ukrainian authorities. If Ukraine fails to follow this road map, nobody (except perhaps Russia) will provide loans to the government. Clearly, the country has no political actors willing to explain the real implications of the agreements negotiated and signed with the EU and the IMF. How is that different than expecting a miracle to happen again?
In the context of the Ukrainian crisis, USA and EU sanctions on Russia (supported by several other countries) will work as described above. In the short term, they will stir up passions. Russians are ready to support their leaders in this difficult period of confrontation with the outside world.
However, in the long run, the sanctions will become a heavy burden on the Russian economy. The Russian financial system has been downgraded and confined to payment transactions, i.e., payments for commercial transactions and current transfers. These are not the most severe financial sanctions possible, but the mere fact of their existence makes it more difficult to secure financing for investment projects. Russia is looking like a risky investment, and that impedes economic cooperation. The Russian economy will not be destroyed, but declining investment and zero growth, combined with falling real wages, may become the new normal.
Economic sanctions won’t just hurt the Russian economy, but also the countries that imposed them. However, the threat to our economy is much greater.
In a situation like this, both sides must seek compromise. A political compromise in Ukraine could de-escalate tensions. The hostilities must come to an end before the work of untangling the economic knots can begin.
