MOSCOW BLOG: Are sanctions failing?

MOSCOW BLOG: Are sanctions failing?
The EU is discussing the ninth package of sanctions on Russia, but the negotiations have become bogged down in disputes. Has the series of sanctions packages run its course? / bne IntelliNews
By Ben Aris in Berlin December 13, 2022

The EU has done a deal with bad-boy Hungary that gets Budapest’s agreement on a global minimum tax and the €18bn Ukraine macro-aid package. In return Hungarian Prime Minister Viktor Orban had the frozen EU funds he wanted released.

Hungary was accused of using a “blackmail veto” but really this is just normal politics, isn’t it? You want something that someone else has so you use your leverage to get your way. Although the atmosphere is very charged by the war, this is just business as usual in the EU. It’s not great, but it’s what makes the EU so powerful – the fact that all these countries can work together, even if that process is ugly and messy.

The same thing is going on with the talks over the ninth sanctions package. Russian President Vladimir Putin’s advantage in the war is he can order something, and it will happen – well, in theory. In practice lots of things that are supposed to happen don’t.

But typically for the EU, the negotiations over what will go into the ninth package have got bogged down in disagreements and entangled in agendas. I’m not quite sure what the sticking point is, and the details of what is in the draft that have been revealed make this the most meaningless package to date. There is a new list of 144 nobodies (some media stars and a cousin of Chechen strongman Ramzan Kadyrov), a couple of relatively unimportant banks and some vague talk about dual-use tech.

Will there be a tenth package after this one is agreed? Yes, almost certainly, as these packages are increasingly driven by the “need to do something”. But the nature of the sanctions has changed from the sledgehammer blow of the first package in March to a death by a thousand papercuts that is the ninth package. There are still a lot of extremely damaging measures that could be introduced, but we have reached a point where any new sanctions do more economic damage to the EU than they do to Russia. It’s OK to let Ukrainians spend Christmas day in dark freezing-cold apartments, but to do that to Germans is unconscionable. (And this issue is very likely to come up again next winter – but worse, according to the International Energy Agency (IEA).)

Clearly what’s stymieing the ninth package talks is what is not in the draft but should be. Bringing the oil price cap down from $60 to $30 must be a major topic, as a dozen countries have clubbed together, led by Poland, to insist on the lower cap. Another huge item is that the EU is starting to think about putting sanctions on Russia’s metallurgical businesses. So far, after the debacle that followed an attempt to sanction oligarch Oleg Deripaska’s RusAl in 2018, everyone has left the metal sector well alone when it comes to drawing up sanctions. That is supposed to change next year.

The problem so far has been that lots of EU members are not prepared to wreck their economies for Ukraine’s sake. The obvious one is Greece, which objected to the ban on shipping Russian coal in the fifth package because it does so much of it, and got an exemption that allowed it to ship Russian coal to non-EU destinations; Russian coal exports hit a record high last month and at a time when the price of coal this year is 165% higher than last year. Or Spain, which rejected European Commission President Ursula von der Leyen’s idea of a mandatory and Brussels-directed 15% reduction of gas usage. The compromise there was very ugly, as the reduction became voluntary and 17 countries from the 28 member states got carve-outs and exemptions; Spain, which gets its gas from Africa, has since increased its gas use year on year.

We write a lot about the shortcomings of the sanctions and how many loopholes they contain and also about how successful Putin’s Fiscal Fortress has been in deflecting the worst pain. I was just accused of being a nihilist and downplaying the West’s resolve to help Ukraine or all the successes Ukraine has had. But I think that people are framing the question wrong.

We have to face a few hard truths. Ukraine is not winning this war and it can’t. Of course, it has had many stunning successes and has done far better than anyone dreamed was possible, but it simply doesn’t have the industrial production capacity to beat Russia. And the West is totally allergic to giving it the kind of weapons needed to win as Nato is terrified of starting WWIII – Nato Secretary General Jens Stoltenberg said this at the outset: the number one goal of Nato is to not start WWIII, not to ensure Ukraine’s victory. In my book that makes peace talks with Russia still holding large swathes of Ukrainian territory inevitable.

The issue is not victory/defeat but simply timing. The sanctions already in place make Russia’s stagnation inevitable too. It has in effect been relegated back to an Emerging Market – it was classified by the UNDP as a “high income country” but has more recently been downgraded back to “middle income” – but unlike other EMs it now has no possibility making the transition to become a first world country, thanks to the financial and technology bans.

Russia's economic potential has been destroyed by the sanctions.

But that doesn’t help Ukraine win the war. Putin has already put Russia’s economy on a war footing, while the West is only just starting to do that. Russian missiles made in August have started appearing on the battlefield, but the Western production of new arms and ammo are only expected to arrive next summer.

The debate going on now is about crushing sanctions that will collapse the Russian economy immediately, not in five years' time; that is what Poland and the Balts are pushing for. But the rest of the EU realise that those kinds of sanctions would also crush their own economies, so they are resisting. Bottom line in my opinion is, the EU doesn’t have the stomach to take any serious damage for Ukraine’s sake. The Commission just had a report that assessed the damage to itself thanks to the war as fairly mild and costing a modest €550bn in relief, which given the size of the EU economy is pretty modest.

This is currently a proxy war with Russia, but the point of proxy wars is you are supposed to let someone else do the fighting, so you don’t have to, so that your life stays normal.

Without the crushing sanctions Putin can easily keep the war going for at least a couple more years. In other words, he has time to completely destroy the Ukrainian economy long before the existing sanctions cause him any really unsolvable problems at home. At some point this calculus will come to the fore and a serious effort at peace talks will start. I think more and more politicians – Putin included – can already see this coming, hence all the talk of talks that has come up in the last month. It is preparing the ground for a more serious attempt at freezing the conflict later. Obviously with Kherson’s liberation still clear in the rear-view mirror those talks can’t start now, but after a long dark miserable winter with no more major military gains?

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