This is an excerpt from an article that originally appeared at Business New Europe
So if the West won’t fight, what can it do? Actually it can do much other than negotiate a deal. But the West can’t be seen to do nothing, so sanctions have been imposed, which are as much about being seen to act by domestic voters as they are about punishing Russia.
Sanctions have a utility as they act as bargaining chips, but as a diplomatic tool designed to bring an end to the conflict in its own right, sanctions are more than useless – they are in several ways actually counter-productive.
If the goal of sanctions is to force the Kremlin to back down over Ukraine and withdraw military support for the rebels, then numerous studies have shown that sanctions are an ineffective tool when it comes to forcing policy changes.
If anything, they force leaders of the targeted country to dig in and generate support from the population for a harder line, as all the recent polls in Russia show is happening there.
If the goal of sanctions is to reverse the prosperity in Russia, undermine Putin’s popularity and forment either a coloured revolution or a palace coup, then this is simply naïve.
The impact of sanctions on domestic politics has been to destroy the nascent opposition by making it totally irrelevant, and to make the elite close ranks around Putin at a time when the slowing economy made him vulnerable for the first time in his 14 years at the helm.
If the goal of sanctions is to punish Russia economically and push it to the edge of a crisis, again forcing Putin to back down, then they are unlikely to work. So far, despite the double whammy of sanctions coming on top of the fortuitous (from the West’s point of view) collapse of the oil price, the Kremlin has made no concessions whatsoever, but it has responded in kind with a painful ban on European agricultural goods.
Undermining Russia’s economy is a very dangerous game to play. First, because Russia’s economy is increasingly integrated with the rest of Europe and, as the second largest retail market in Europe, a Russian slowdown inflicts economic pain on the rest of Europe at a time when Europe’s economies are so sick the European Central Bank has been forced to launch its own quantitative easing.
Second, because Russia is so big it has become an investment node in the region, and to bring Russia’s economy down would be to bring down the economies of the entire Commonwealth of Independent States (CIS).
The main channels are through trade, banking and massive remittances of guest workers – including millions of Ukrainians – sending their wages home. In per capita terms, pay in Russia ($24,114 in 2013) is just under three times higher than that in Kyiv ($8,790) and half of Tajikistan’s GDP is made up of Russian-based remittances.
Third, thanks to Russia’s large currency reserves, low external debt and triple surplus of trade, current account and federal budget, it can weather a lot of economic pain; the current thinking is reserves will be enough for at least two years and possibility longer.
Moreover, the Kremlin is as unlikely to cave into financial sanctions as it is to economic sanctions, as both are seen as bullying, and Putin will take it down to the wire, risking a full economic crisis rather than give in. An economic collapse of Russia would be bad news for everyone on the Continent.
The only way to end the conflict and stop the inevitable escalation in bloodshed is to go back to the negotiating table. The West needs to concede that Russia today is not the same Russia in 1991 or even Russia in 2000, but has emerged as a major European power and has its own interests it is determined to protect. The concessions that Putin is asking for should not be hard to accept.