US Sanctions Will Hurt "Vulnerable" Russia

Oliver Bullough

Friday, 21 March, 2014

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IWPR’s Caucasus editor Oliver Bullough, recently returned from Crimea, talks to editor Daniella Peled about the potential consequences of the United States sanctions imposed on Russia this week, and the challenges now facing Ukraine.

What is the significance of these US sanctions?

Essentially, all of Vladimir Putin’s best friends will now be incapable of using dollars. They include Gennady Timchenko, who owns Gunvor, one of the largest commodity traders in the world. Bank Rossiya, one of the country’s biggest banks, is now effectively frozen out of the global market.

The Rotenbergs, who used to practise judo with Putin, will be unable to use dollars. Then there is Putin’s chief of staff Sergei Ivanov, another former KGB officer who is not considered personally wealthy but who, as far as wielding power goes, is a big beast.

The impact of what the US has done is likely to be enormous. All these people are connected with managing Putin’s personal wealth, and now he can’t have that. This will really annoy Russia, not least because there isn’t much it can do in response.

The Russian economy is really extraordinarily vulnerable right now. This comes at a time of very significant capital flight from Russia. Capital flight for this quarter will probably exceed the sum for all of last year, putting a very heavy strain on the rouble and the national bank.

Then there is the cost of subsidising the Crimean economy, which has been estimated to be around 500 million dollars a year. Russia will have to buy almost all of Crimea’s energy from mainland Ukraine at a time when Kiev won’t be in a mood to offer any discounts.

Also, 70 per cent of Crimea’s tourism comes from Ukraine.

The US is trying to drive a wedge between money and power in Russia. Other very wealthy people in Putin’s circle are going to be very worried. Obama has said he will consider further sanctions, and I think this will have made them very nervous. 

What is the European response likely to be?

It’s hard to imagine what Europe will do now. It will make them look pretty silly if they don’t come out with something serious, too.

If Europe did the same – banning the same people and companies from investing in the European financial system – it would essentially destroy them. The message would be that if you’re friends with Putin, you will pay the price for his decisions. You can’t be both friends with Putin and friends with the West.

One of the things about these sanctions is that now US individuals or institutions, or any individual or institution with a presence in the US, will not be able to do business with those on the sanctions list. This applies as much to Barclays Banks as it does to Bank of America. People will have to make a choice between the US or Russia, and the majority will answer that they want to stay friends with America.

The West doesn’t want to go to war with Russia with guns. We are weak militarily, and no one wants to die for Crimea. So the decision has been made to fight on a different front, a front on which we can win. Russia is massively dependent on the European economy, and this will show up its vulnerability.

Kiev is in real trouble because it is very weak. It has no control over events and the best it can do now is to try and keep its control over Donetsk and Kharkiv, hold elections and try and firm up its terms with the International Monetary Fund. It is the beginning of a long and protracted process that will be quite painful because Ukraine will have to undergo significant reforms. The entire economy has been based on corruption for the last 20 years. 

You were in Crimea as the March 16 referendum was taking place. What were your impressions?

I found Crimea very sad. Some people I met were very euphoric and clearly felt they were experiencing a historic moment. They didn’t give any thought to the consequences – where the water, gas, power or tourists were now going to come from. In Simferopol airport, I saw flights to Kiev and Istanbul listed as cancelled, and I have a feeling they won’t be coming back at all.

I was very struck by the astonishing dignity of the Crimean Tatars in the face of remarkable provocation. There was also a total disconnect between them and the ethnic Russians. One Russian guy told me that Stalin’s deportation of them had actually saved the Tatars, even though 46 per cent of them were killed in the process. That level of dissonance within one society is very dangerous.

Crimea is now likely to become a new Abkhazia or South Ossetia. I was in Abkhazia in 2008 after the August war, and there was a similar euphoria, with people shooting into the sky and bouncing around. Now it is seen as a disaster which has kept them in a kind of limbo.

In a year’s time, people in Crimea will realise the same thing. What’s particularly bad, from an international perspective, is that a lot of people will blame the West.