Russian sanctions could cost West over $700bn, say analysts - The Ukrainian crisis must now be used as an opportunity for reforming Russia

Foreign Affairs & Security
Wednesday, August 12, 2015
Adriel Kasonta

A report released today calls for a diplomatic offensive on Russia in a bid to arrest the implosion of Ukraine, and estimates the potential cost of sanctions against Russia to the West as being over $700bn.

Russia must be involved in negotiating a European co-operation agreement with Ukraine, given the extensive history of Russian involvement in the region and the large Russian population within Ukraine’s borders.

The report is authored by Adriel Kasonta and a group of professionals and academics with first-hand experience of Eastern Europe. It addresses the historical and cultural contexts of the contemporary tensions, and considers those tensions as economic and political problems capable of peaceful solution.

Following a recent House of Lords report on ending the violence, the report calls for greater structural aid to Ukraine, deeper engagement with Central and Eastern Europe, and the use of Ukraine as a door to European influence and reform in Russia herself.

 

Quotes from the report:

 Estimated financial costs of sanctions

“The costs to Europe include €120bn worth of exports to Russia are in danger, a total volume of business of €326bn, almost 2 million jobs are at risk, as well as potential default on $147bn of Russian debt held by EU banks.

“The cost to the UK alone: €8.6bn of total exports, 119,000 jobs at stake, £27bn of Russian capital invested in the UK.

“Cost to the US: total trade worth $137bn, $38bn US exports to Russia, up to $30bn US capital tied up in Russia.”

"This results in a total potential exposure of approximately $755bn to Western economies"

 

The geopolitical effects of sanctions

“Sanctions have led to a noticeable shift in the Russian economy orientation from the West to the BRICS countries and former Soviet Union republics. Shortly after the second round of sanctions, Russia signed a valuable natural gas agreement with China worth $400 billion, in order to lessen its economic dependence on the EU. As a result of this agreement, Russia will, from 2018, have an alternative market in China for its natural gas. Russia has also received a political support from the Chinese vice premier, Wang Yang, who expressly stated on 11 October that China “strongly opposes” sanctions against Russia.

“This may create a potential threat to the West if Russia continues to develop its alliance with the BRICS, and China in particular. If BRICS countries continue to replace Western exports to Russia, which are banned (albeit at higher costs for Russian consumers), sanctions will be less effective.

“On 8 August 2014, as a response to the Western sanctions, Russia announced an immediate embargo on “certain meat, dairy, fruit, vegetable and processed food products from the EU, USA, Canada, Australia and Norway. The EU is the most affected amongst the listed countries and, in particular, Poland, Lithuania and Germany, as the EU products amount to 73% of imports that were banned by Russian Embargo. This is expected as the EU alone represents 86% of Russia's total imports from the above-mentioned countries and 43% of entire Russian imports from the world.

“It is absolutely necessary to find a non-military solution on satisfactory terms acceptable for Ukraine, Russia and the West by the end of 2015, otherwise the Ukrainian economy will have very high potential to default. There must be reached a diplomatic compromise, which will allow Russia to remain an influential political player in Eastern Europe, while letting Ukraine choose its own internal political regime and foreign policy orientation.

Political assistance to Ukraine

“The practical difficulties of dividing Ukraine, or imposing a single identity, serve to underscore a key point--Ukraine owes its current identity to both Europe and Russia. Asking it to choose between them is therefore asking it to deny part of its heritage.

“Given Russia’s nearly ubiquitous cultural presence in Ukraine, building a Ukrainian national identity at the expense of Russian would be like trying to build Canadian identity around anti-Americanism and a refusal to speak English. Even if it could somehow be done, the social, psychological, and economic scars left by the process would last for generations.

“Conflating cultural identity with citizenship is almost always a recipe for disaster. It inevitably alienates minorities and undermines the very national unity being sought. A better alternative is to make cultural pluralism serve the security interests of the nation.

“The better option is therefore replacing the current emphasis on building a distinctive Ukrainian cultural identity with an emphasis on building an inclusive Ukrainian civic identity.

“It must first be acknowledged that Ukraine’s economic survival depends not on Western bailouts, but on renewing Russian investments there.

“And as the Ukrainian economy continues to shrink, more and more families find themselves relying on remittances from migrant workers, the majority of whom still find work in Russia.

"By demonstrating political maturity, overcoming the Ukrainian government’s ideological resistance to Russian investment in Ukraine would also go a long way toward restoring international investor confidence in the country. In the long term it might even lay the foundation for transforming the current Eastern Partnership program from its current confrontational “two against one” stance, into a trilateral EU-Russia-Ukraine partnership. This would be consistent with the long term strategic objective of reducing tariff barriers between with European Union and the Eurasian Union, which was proposed by Russian president Putin in 2010, and recently revived by German Chancellor Merkel.

 

Economic assistance to Ukraine

“Russia, together with the EU, would have to come to an actual agreement in respect to the crisis in Ukraine. Russia would have to make assurances in respect to its non-intervention in the conflict as well as the political and international affairs of Ukraine. On the other hand, the West would have to assure the Russian government that the vital Russian interests in the region will be preserved. Economic aid should be one of the most important matters on the agenda. While the US, Europe, and the IMF continue to provide financial assistance to Ukraine, there is a need for a comprehensive package provided by both Russia and the West.

“Tension in the Donetsk and Lugansk regions has been decreased. Many experts agree that Russia does not intend to escalate the conflict further in those regions or even to support an establishment of "Novorossiya" state in the occupied territory.

“According to a social survey, many Ukrainians believe that the best way to resolve the conflict is to negotiate a settlement with the separatists and Russia.

“The other step would be to establish more beneficial terms on Ukrainian energy debts, as Ukraine would be able to use these funds to address the current economic crisis. In return, Ukraine would be able to guarantee Russia’s continued access to the energy delivery infrastructure and Ukrainian export market. It is also important to Ukraine to restore stable trade relations with Russia, as reorientation of Ukrainian exports towards other markets will require more time and investments.”