MOSCOW BLOG: West blowing holes in its own sanctions regime

MOSCOW BLOG: West blowing holes in its own sanctions regime
The EC just agreed on a seventh package of sanctions, except they were gutted of any energy sanctions after Hungary objected. What they did contain was clear explanations on what would not be sanctioned. The West is increasingly blowing holes in its own sanction regime.
By Ben Aris in Berlin July 20, 2022

The EU “agreed” on a seventh package of sanctions yesterday, except they were gutted by Hungary that said it would veto any package that included sanctions on energy.

The oil price cap was supposed to be the centrepiece of these sanctions and was launched at the G7 summit in Bavaria last month, but the idea immediately ran into problems. The unintended consequence of sanctions is that Russia is currently earning the largest amount of money it has ever earned – which I think we can file under “failure” for now – and oil price caps were supposed to undo that. Of course, long-term these sanctions are crushing, but in terms of bringing the war in Ukraine to an early end they are a bust.

There were some new things in this package. A ban on gold exports to the EU was added, but that doesn’t amount to much and gold is pretty easy to sell, because it is gold. New sanctions were placed on Sber, but again the damage of banning it from SWIFT has already been done right at the start so that makes little difference.

Indeed, the biggest change was the new holes in the sanction regime the seventh package introduced. Specifically, the package makes it very clear which Russian products will NOT be subject to sanctions to stop the self-sanctioning of these products by Western companies: grain and fertilisers – both top five export earners for Russia after hydrocarbons and weapons.

The sanctions have failed because there is, as we have been saying there would be from the start, significant leakage. India and China taking up all the oil exports that are not going to Europe now is the most notorious example, but there are lots of others. This is leakage via the non-aligned world that has not subscribed to the West’s sanction regime – which is pretty much the whole world bar the G7. In Europe notably Hungary and Turkey (and less significantly Serbia) have also refused to sign up.

But in addition to Russia’s “friends” the EU is also increasingly blowing holes in its own sanctions regime as it starts to grapple with the realities of Russia’s real place in the global economy. For years Russia has been derided as a glorified petrol station, but it turns out it is a lot more important than that.

The centre of gravity of this story is shifting from the crushing effect of early sanctions and increasingly it has become focused on the hole-blowing in the regime that is going on. There was another example last week when Canada blew a hole in the sanctions by deciding to send Gazprom’s Nord Stream 1 pipeline compressor back to Russia, which the EU ruled “does not violate sanctions” when clearly it does. (Oil and gas technology exports to Russia are supposed to be banned.) Obviously getting gas ahead of winter is more important to the EU than hurting Russia at this point. Indeed, it is more important than climate change as emissions have erased all the gains they made during the pandemic lockdown and just hit a new all-time high, according to the International Monetary Fund (IMF). We have two big stories on the impact of the looming gas crisis and what the EU intends to do about it on the site today.

The pendulum is starting to swing Russian President Vladimir Putin’s way again. Progress in the military campaign in Donbas has slowed to a crawl, but there is still progress. The US HIMARS rockets have made some difference, but they are not a game-changer. The problem is Ukraine only has six of them and they come with a six-pack of very expensive rockets. They have been used to devastating effect to blow up many Russian ammunition depots, but the Russians will certainly learn to split these into small dumps and actually bother to camouflage them. That of course will lengthen supply lines and further drag out the war, but this is what the Russian army does: just keep grinding away. And Moscow still has the advantage in artillery heavy weapons insomuch as it can throw more lead at Ukraine than Ukraine can throw at it, even if the Ukrainian rockets are more accurate and the Russian targets are sitting ducks for the meantime.

Next up will be the restart of Nord Stream 1 that is due tomorrow. The Kremlin hinted yesterday that it will resume gas flows, but don’t hold your breath, as Putin said that flows probably won’t go back to even the 40% of normal before the pipe was shut down for maintenance work on July 11.

I doubt that the Kremlin will close down flows completely. Instead it will probably play silly buggers with deliveries for the rest of the year. Shutting off gas completely is too crude a cudgel, whereas reducing flows with promises to increase them if the West does X gives the Kremlin endless diplomatic possibilities. The Kremlin is a master of muddying the waters so the newswires will be buzzing for months with breaking alerts as this game plays out.

Also significant, Putin was in Tehran yesterday and amongst may other things the Iranians have just said they are “nuclear weapon” capable, even if they haven’t gone as far as refining uranium to the requisite purity nor started a bomb programme. Iran, for obvious reasons, is not in the Western camp and Putin was there to highlight the fact. The White House looks a bit freaked out and US President Joe Biden said this week that the US is “prepared to use force” to prevent Iran from getting the bomb.

Turkish President Recep Tayyip Erdogan was also there as the Turkish strongman continues to blatantly play both sides in the hope of boosting Turkey’s regional clout – so far, he has been very successful.

This will be the Kremlin game plan going forward: to create as many new headaches for Washington as it can and blow as many new holes in the sanction’s regime with “friendly countries” as it can. At the same time by squeezing the things it controls, like gas and grain, it has already had quite a lot of success in encouraging the West to blow holes in its own regime.

In Iran it has a fertile garden, as is the Middle East in general – especially after US President Joe Biden was rebuffed by Crown Prince Mohammed bin Salman Al Saud (MBS) when he called on the Kingdom of Saudi Arabia to step up oil production last week.

Increasingly it is starting to look like the West has overestimated its power to influence the rest of the world, or at least underestimated the rest of the world’s reluctance to get involved. It seems to me that Putin has better assessed the possibility of building ties with the non-aligned nations as he is pursuing a mercantile strategy, handing out energy, materials and arms deals to all these countries, which is actually what they want – and actually all Russia wants is also to do business.

Just how important the technology embargo is for Russia’s long-term development, how tight the EU can draw the sanctions noose around Moscow’s neck, and how friendly Russia’s “friendly nations” really are all remains to be seen. I’m sure this will turn into a very drawn-out game.

This article originally appeared in Editor’s Picks, a free daily email digest of bne IntelliNews’ best stories from the last 24 hours. Sign up for free here.