Economic Implications of the Sanctions to both Russia and Other Targeted Countries for Ukraine (Research Paper Sample)

Ukraine Crisis
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Introduction
Literature on economic sanctions centers mainly on sanction effectiveness by exploring the strategic interface between sender countries (those that impose economic sanctions) and target countries (those subjected to the sanctions). The literature ignores a fundamental aspect of the inadvertent consequences of economic sanctions on non-sanctioning, third party countries. Multilateral sanctions, such as those by the European Union (EU), are likely to lead to significant disruption in economy in countries subjected to sanctions because a reduced ability to find alternative markets for their financial relations and trade. On March 16th 2014, following a referendum, Ukraine lost its hold over the Crimea region (Woehrel 2014). Western countries objected to the referendum results and hence imposed sanctions against top businessmen and politicians in Russia. Russia also responded with sanctions of its own to Western countries and banned the importation of products such as fruits, vegetables, meat, fish and dairy products from Europe. Therefore, the Ukraine Crisis has disrupted economic relations between Russia and Western countries (Financial Times 2014). This paper examines the economic implications of the sanctions to both Russia and other targeted countries.
Background
There lacks an agreement on the impact of unilateral sanctions on economic ties between the sanctioned country and the non-sanctioning, third party countries. Some observers argue that unilateral sanctions improve the economic relations between third party countries and the sanctioned country. On the other hand, critics assert that the negative spillover affects the ties between these countries (Hufbauer, Schott and Elliott 2009; Peksen 2006, p. 3-4). This duality of viewpoint will be discussed in this paper with emphasis on the Ukraine crisis. The paper will determine if sanctions have a spillover effects on non-sanctioning countries, or if the sanctions only affect the economic ties between the sanctioned and sanctioning country.
The US and EU Sanctions Against Russia
The US government was in the forefront in imposing sanctions that targeted Russia by freezing foreign assets of some businessmen and politicians in the inner circle of Vladimir Putin. The US also implemented travel bans for over 20 politicians and businessmen from Russia. This forced Russia to retaliate by doing the same to some US politicians. The EU also rejected the referendum results and added names to the US list of sanctioned individuals. The EU also imposed bans on Schengen visas issued by EU embassies on Russian soil for citizens of Crimea (Kholodilin, Ulbricht and Wagner 2014).
The EU Committee of Permanent Representatives (Coreper) proposed broad measures on asset freeze and travel bans totaling 20 entities and 87 persons. The proposals were adopted by the European Council and became law. These were called ‘tier three’ sanctions and included oil technology export and capital market restrictions and arms embargo to future contracts with EU countries (Cenusa, Emerson, Kovziridze and Movchan 2014; Ivan 2014). The EU and the US effected the sanctions in July restricting access of Russian banks to finances from Western countries. The restrictions meant that companies and nationals of EU would no longer buy or sell equity, bonds or other financial instruments that have a maturity of more than 90 days that are issued by Russian banks owned by the state and their subsidiaries. The restrictions also prohibited brokering of such instruments (Smith 2014, p. 8).
Since the economic sanctions are far and wide, the paper will not belabor this point because the scope of the paper was on the consequences of the sanctions. The paper will proceed to examine the economic cost of the sanctions.
Implications of the Sanctions
Observers agree that EU member states hold vested economic interests, which makes complicates the formation of a united front against Russia difficult. The EU is experiencing a general weak economic situation, and the crisis in Ukraine is poised to tilt the Eurozone into deflation. There is ongoing uncertainty generated by a steadily increasing sanctions system between Russia and the West. Some analysts argue that the EU might be contended with this gradual sanction approach because the uncertainty generated by the sanctions may disrupt the economy of Russia than that of the West. The EU believes that hindering the access of Russian state-owned banks and institutions to capital markets would push up their cost of generating funds (Ministry of Finance 2014). This would limit the institutions capacity to finance the economy of Russia, except if public authorities can offer substitute finances. The sanctions are likely to lead to market uncertainty, which is likely to cause capital outflows from Russia (EUobserver 2014; Kholodilin, Ulbricht and Wagner 2014).
Russia has retaliated against the sanctions and is likely to add more measures. There have been suggestions of banning Western auditing firms, such as Deloitte, McKinsey, PriceWaterhouseCoopers, KPMG, Boston Consulting Group and Ernst and Young, from Russia. Russia is also drafting a bill that would allow for the confiscation of Western assets in the country. However, it is uncertain if these two proposals will come into fruition (Smith 2014, p. 12).
The EU and the US economic sanctions have targeted the energy sector of Russia. In order to maximize energy security, the EU agreed on a series of measures to ease their collective reliance on Russian gas and oil. Critics opine that the EU policy to reduce overdependence on Russian energy sector is doubtful to be successful in the short run, for various reasons. The energy sanctions would disrupt the economic ties in the EU countries. It is estimated, by the European Commission’s 2011 report, that EU member states import 35% oil and 30% gas from Russia. Furthermore, oil and gas suppliers, such as Algeria, Azerbaijan and Norway, have no reserves that can compete with Russia for the long haul. The pipeline infrastructure of these countries is insufficient to deliver the needed volumes that can replace Russian oil and gas. Iran is another alternative for EU, but it is likely to create similar risks to the energy security of the EU (D&B 2014, p.3; Kahn 2014).
Energy sources, such as shale gas, which are unconventional, seem to gain little or no foothold within the EU. Unlike in the US, the myriad of factors that enhanced the boom of shale gas are not available in the EU. Therefore, the large-scale use of this alternative energy source in EU is out of the question. In conclusion, other energy sources such as liquefied natural gas (LNG) from Qatar and the US are not likely to be an alternative solution to the energy needs of EU in the medium or short term, because of lack of adequate LNG infrastructure across Europe. In light of this reality of shortage of alternative sources of energy for the EU, it would be difficult for EU to limit its dependence on Russian oil and gas, at least in the short to medium term (Kahn 2014) With this reality in mind, it is imperative for EU to limit its tough economic sanctions on Russia, especially given the present weak state of its economy (D&B 2014, p.4).
Still on the energy sector, some major EU and US entities that deal in oil and gas are likely to be affected with the sanctions. For example, British Petroleum (BP) owns a 20% stake in a state-controlled oil company called Rosneft. The company is part of Russian companies sanctioned by the US. According to BP financial statement, the stake of Rosneft had boosted its profitability. BP further warned that continued sanctions on Russia’s energy sector could harm the business (BBC News Online 2014). This example illustrates how the economic sanctions against Russia will have a spillover effects on other countries and business entities that are non-sanctioned.
Sanctions-busting or Negative Spillover Effects
A growing body of literature on consequences of economic sanctions suggests that unilateral sanctions have negative consequences on trade. One school of thought regarding the consequences of sanctions is referred to as the “sanctions-busting”. They argue that third parties who entail private actors and governments are likely to try to take over the economic prospects generated by the decision of a sanctioning country to reduce its economic arrangements with the sanctioned country. A notable example of sanctions-busting is called the “black knight effect”. This refers to third countries that have vested political motives, which try to ruin unilateral sanctions by unlocking their markets for products from sanctioned countries or supplying the countries with products. The effect was notable when Soviet Russia improved its economic ties with Cuba after the US sanctioned the country (Cox and Drury 2006; Peksen 2006, p. 6).
Another reason why a country may engage in sanctions-busting is for opportunistic purposes to make economic gains. Third countries will aim to take the new trade opportunities in sanctioned countries in order to make profit. Regardless of whether the motive for sanctions-busting is black-knight effect or opportunistic purposes, the end result is improved economic ties between the countries. In principle, third countries often tend to avoid weakening economic coercion by not participating in new economic relations with sanctioned countries. In addition, third countries may fail in an attempt to influence unilateral sanctions (Morgan and Bapat 2003; Peksen 2006, p. 7). In the current Ukraine crisis, the sanctions-busting effect, for economic gains has been met with severe penalties. For example, the US authorities fined, a French bank called BNP Pa...