In March 2014, when the Obama administration first invoked economic sanctions against Russia, no one knew how long they would last. The White House was betting the pressure of sanctions would change Vladimir Putin’s mind about annexing Crimea and deploying Russian military forces there.
A year and a half later, it hasn’t worked and American businesses that deal with Russia are caught in the cross-fire of economic warfare.
With sanctions, the administration initially tried targeting members of Putin’s inner circle, hoping they, in turn, would convince the Russian president to stop military action in Ukraine.
When that failed, the U.S. tried to hit Putin where it hurts, limiting financing to Russia’s largest banks and energy companies, suspending credit financing for exports to Russia and financing for economic development projects in the country. It clamped down on technology transfers that could help Russian companies explore new sources of oil.
Putin simply dug in his heels, predicting in April that Russia’s economy will return to growth within two years. Russia’s Deputy Prime Minister even predicted that the Russian people would eat less in order to survive.
Sanctions “cannot work,” Russia’s ambassador to the United States, Sergey Kislyak, told me at a July meeting with Seattle business leaders at the Council for U.S.-Russia Relations.
“When it comes to sanctions it's something that we cannot accept the wisdom of it, we cannot accept the legality of it, because it's based on the internal law of one country,” he said, “and what is most important is that it doesn't help any cause. And it's not going to change principles or positions in Russia.”
In the West, the sanctions hit the financial industry the hardest.
“Everybody who is in the financial sector is downsizing in Russia,” Anders Aslund, an economist and senior fellow at the Atlantic Council, told me. “Everyone is extremely insecure because they don’t know what will be the next step.”
Companies face multiple risks, Aslund explained. There’s the direct risk of being fined for violating sanctions. They’re also fearful of the credit risk associated with Russia. Then, there’s a risk to business reputation. “The further sanctions go, the greater criminalization of an economy normally gets,” he said, citing Iraq, Iran and Yugoslavia.
Compliance is another major headache. Companies now must have massive bureaucracies to check that they don’t violate the sanctions. Aslund said he recently spoke with an investment bank employee who complained he now has to spend two hours a day with his compliance officer. “He said he would rather have a root canal filling than meet his compliance officer,” Aslund said.
Other losers from U.S. sanctions are oil companies, with three main areas of oil exploration stopped: Arctic deep sea, offshore, and shale oil.
Ultimately, however, what’s really hurting Russia far more than U.S. or European sanctions is the plunging price of oil. Russia has cut imports by half because of the price of its major export.
“Russia is now a shrinking market and nobody is interested in a shrinking market,” says Aslund.
In our interview Ambassador Kislyak brushed that off. Based on what he is hearing from American companies operating in Russia, he said, “they are comfortable in Russia, they understand the market, they are interested in continuing, and nobody seems to be willing to withdraw.”
But some companies are doing just that. The Detroit New reports that General Motors’ sales in Russia fell 28% last year and the company has stopped producing parts in Russia. G.M. plans to stop selling all Opel and most Chevrolet vehicles in the Russian market by the end of 2015.
But U.S. trade with Russia is miniscule. According to the U.S. Commerce Department, U.S. goods exported to Russia totaled just $10.7 billion in 2014, equivalent to less than 0.1% of U.S. GDP. U.S. goods imported from Russia totaled $23.6 billion, just under 0.2% of U.S. GDP
The Russian ambassador said he’s lived through previous periods of U.S.-Russia confrontation and claims that this, too, will pass. “Bit by bit things will return. I don’t know when. The realities of the world will push us there.”
But, with trade between the two countries just a drop in the bucket, there’s little downside to continuing this economic war.
Jill Dougherty is a Cipher Brief Correspondent.
