Ben Aris in Moscow -
What does the West hope to achieve in its showdown with Russia over Ukraine? An increasing number of articles have appeared recently arguing there is no long-term strategy and that the US and EU are being sucked into a destructive "sanctions spiral" that will only deepen the misery of Ukrainians, and is already beginning to hurt the wider economic recovery in Europe.
Editor of Handelsblatt, Gabor Steingart, suggested in an opinion piece in early August: "The idea that economic pressure and political isolation would bring Russia to its knees was not really thought all the way through. Even if we could succeed: what good would Russia be on its knees? We should stop demonizing 143m Russians just because they look at the world differently than [US Senator] John McCain."
Germany finds itself on the front line in the conflict, mainly as it has ten times more companies invested and working in Russia than any other European country. It also has heavy dependence on Russian energy exports and relative physical proximity to both Russia and Ukraine.
The New York Times noted on August 12 that the German economy, which accounts for about a quarter of all Western European economic activity, is beginning to falter thanks to the chaos in Ukraine.
Growth figures out of the Eurozone released on August 14 illustrated the slowdown in the recovery. The single currency region saw GDP growth flat in the second quarter, after recording a sluggish 0.2% in the first three months of the year.
Weakness in Germany dragged on the result. GDP contracted by 0.2% in April - June, after growing by 0.7% in the first quarter. Germany's Federal Statistics Office said the economy is "losing momentum." Analysts suggested that amongst technical issues, the Ukraine crisis also clearly had an effect, hitting confidence on investment in particular.
Fight or flight
The economic pain in the EU is clearly growing. Danske Bank released a note on August 12 arguing that neither Europe nor Russia will be able to stand much more, and both are likely to look for a way to end the sanctions war within the next three months.
"We believe an escalating trade war would be unbearable for both Russia and the EU and that the EU will revoke the sanctions within one to three months, with Russia abolishing its own sanctions," the bank said.
The alternative to backing out of a fight is to "win" it, but what exactly do Europe and the US hope to achieve? The goals are fuzzy to say the least.
The Russian position is clear. Firstly it wants to protect its two strategic assets in Ukraine: the cash-cow gas export pipeline to Europe and its main warm-water naval base in Crimea. More generally Moscow wants to ensure that Ukraine remains outside Nato. It's happy to create a frozen conflict in its nextdoor neighbour to ensure that, unless the West can give it security guarantees that Ukraine will remain neutral - something that has yet to be mentioned as an option.
With the annexation of Crimea the Black Sea Fleet looks safe. But the dangers to the gas pipeline were highlighted in early August when Ukrainian Prime Minister Arseniy Yatsenyuk suggested that Kyiv may seek to cut Russian gas transit through the country as part of a package of sanctions.
However, halting Russian gas flows to Europe would be the geo-political equivalent of Ukraine cutting off its nose to spite its face. At the same time, the very idea spreads panic amongst European gas consumers. Yatsenyuk was rapidly slapped down by a multitude of EU leaders for what was frankly a ridiculous suggestion.
However, the fracas the suggestion caused highlights the main problem with sanctions - long term, they don't work. "There are no recorded cases in which countries under sanctions apologized for their behavior and were obedient ever after," Steingart wrote in Handelsblatt.
The 2008 financial crisis illustrated - to the surprise of many, and especially those in Kremlin - just how deeply Russia's economy is integrated with the rest of the world. The current crisis has only reemphasized that fact.
In addition to the German slowdown, Ukraine's hryvna is the world's worst performing currency this year, having shed 40%. Kazakhstan spent $700m defending the tenge in just one week in early August, in a desperate effort to stave off a second devaluation of 2014.
The trouble is flaring across the region. Greece is set to slide back into recession this year due to the crisis; Bulgarian exports have tanked; Finland is heavily exposed and also likely to go into recession; and the economies of Tajikistan, Moldova and Armenia run the risk of collapse if the damage to the Russian economy expands significantly. In short, further sanctions on Russia would more than likely precipitate a 1997-like financial crisis in emerging Europe that could easily spread to the rest of the world.
Sanctions are instead more of a political sop to domestic political demands that "something must be done" and that "Russia must be made to pay" for its actions in Ukraine, than any real tool that will actually bring the current crisis to an end. However, short of actually launching a Nato-backed military operation, there is actually almost nothing the West can do to stop Putin.
Even rhetorical attempts to make Russia an international pariah have fallen on their face. The US, EU, Australia, Japan and Canada were the original group to sign up to the sanctions regime, with New Zealand and Switzerland joining in the wake of the downing of the Malaysian Airliner MH17. The rest of the world has remained studiously silent for the most part.
Teneo Intelligence summed up the problem neatly. "There is a lack of an overall, medium-term objective behind the sanctions regime, other than catering to a growing domestic consensus," the London-based think tank wrote.
"It was a miscalculation to picture the Maidan protests as a good opportunity to bind ethnically divided Ukraine closer to Brussels in its entirety," Teneo adds.
Political commentator and former head of research at Alfa Bank Peter Szopo zeros in on the basic flaw in that strategy: "If Putin was such an aggressive warmonger aiming to restore the Soviet Union, then how could anybody be surprised about his reaction when the EU foreign ministers started to get involved in Ukraine? So either, the Europeans were naive (which I think they were), or they thought Russia was as weak as in the early 90s, or they just wanted to provoke something (which I think was what the US administration wanted). None of the explanations supports a positive view about the key players in European foreign policy."
The idea that Russia would buckle in the face of a little economic pain looks equally naive. Countries in general are always willing to endure significant hardship if they believe their national security interests are in danger, and Russia does suffering like no one else.
"The Russian government has long accepted potential economic damage from sanctions as a possible price for its goal of preventing Nato and EU expansion along its western border. In contrast, Western powers have yet even to establish two fundamental requirements of a workable sanctions regime: clear objectives and a viable exit plan," Teneo argues.
The stance of the US administration has only made things worse; Washington has fundamentally miscalculated in dealing with Russia. Its bombast has stoked Russian nationalism, convinced Putin that the US is weak and indecisive, and exposed the divisions within the West. The irony is that the wide scale rhetorical attack on Putin has actually strengthened the president at a time when, thanks to a rapidly slowing economy, he had become vulnerable for the first time in his 14-year rule.
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