Wednesday, 5 March 2014

Ukraine: Likelihood of Effective Russian Sanctions

Gallery Russia Ukraine gas row: Russian Gas Supplies Through Ukraine Turned Off
Photograph: Sean Gallup/Getty Images
I'll go ahead an predict that we'll see a deescalation militarily in Ukraine in an empty rhetoric filled new cycle about the 'strength' and/or 'weakness' of various countries and various presidents.

Now, I was fairly incorrect on the Syrian situation (predicting here that the US would likely be blowing up a few chemical weapons sites) the logic behind why I didn't see any real risk of things escalating beyond a few (hundred?) cruise missiles was correct. I didn't see Putin giving Obama such an easy walk out of the corner he had painted himself into.

So militarily, who knows, it's hard to imagine anything major happening here. For no other reason then Russia doesn't seem likely to really gain anything by this. And even if they did, are they likely to escalate beyond the tipping point necessary to induce the west (ie. America) into action?

While freezing oligarch assets abroad might have the typically desired negative impact on Russia, when we think about sanctions we're typically looking at the import and export of goods and services. What sort of goods and services are we looking at here? Oil and gas. Tyler Cowen posted a few links of work done by Daniel Drezner suggesting that sanctions don't infact accomplish much, but the threat of sanctions can have a positive impact. I suspect threats don't work if they aren't credible though.

Can Europe Credibly Threaten Sanctions?

Iranian sanctions worked because the impact on  Europe was minimal. I was surprised that China and India acquiesced (more or less). Their natural gas exports were/are negligible and none of it reaching beyond Iran's immediate neighbors. Of 2011's 2.51 million bopd of exports 630,000 went to Greece, Italy, Spain and Turkey and only 140,000 to the rest of Europe. These numbers shrunk to  220,000 and 20,000 respectively. China, India, Japan, and Korea had more to lose with a combined 1.43 million bopd in 2011 imports which shrunk to 1.08 million in 2012 (EIA link here).

Russia's crude oil and condensate main export destinations, 2012Russia is quite different. With 7.2 million bopd of exports in 2012 with 84% going to European countries (chart below). They also export significant amounts of natural gas to Europe in particular Germany. How tough of a sell will Germany be on imposing sanctions? How about China? 2013 was an excellent year for China - Russia energy relations with a rash of upstream, mistream and downstream partnership/investment/sales deals being announced. How badly would the Ukraine situation have to spiral before they jeopardized that?

To my eye, Putin's in a position of power on both the economic and military fronts. I'm hoping he's content with having his ego stroked a bit and world leaders give him that (without actually giving him anything) and the situation fades away.

Politically, the ramifications aren't clear to me. Would a referendum work? This article suggests that under Ukrainian law there is no mechanism for one.

Still, it might make for a nice feel good political sound bite that everyone can discuss for a news cycle or two as the situation calms down and nothing gets resolved.

So will sanctions with any real teeth be imposed. I'd say no. If anything it might induce a reaction from Putin. Putin's turning up the pressure on the Ukraine now, just as he did back in 2006. In light of recent actions, I wouldn't be wagering too much on a bluff. Putin's holding the cards and won't be afraid to call.

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