Latest US sanctions on Russia: incitement to a coup and a new form of protectionism

The latest round of sanctions the US Treasury has imposed on Russia are a strange affair.

Earlier rounds of sanctions have been linked to specific acts of real or alleged Russian misbehaviour e.g. the death of Sergey Magnitsky, the Crimean crisis, the war in the Donbass, the shooting down of MH17, and the alleged Russian meddling in the 2016 US Presidential election.

This latest round of sanctions is different in that it is not directly linked to any Russian action – real or alleged – at all.  Nor are the people sanctioned – for example the Russian businessman Oleg Deripaska – directly accused of anything.

In place of any specific accusation against Russia or any of the individuals concerned, here is how a statement from US Treasury Secretary Steven Mnuchin justifies the latest sanctions

The Russian government operates for the disproportionate benefit of oligarchs and government elites.  The Russian government engages in a range of malign activity around the globe, including continuing to occupy Crimea and instigate violence in eastern Ukraine, supplying the Assad regime with material and weaponry as they bomb their own civilians, attempting to subvert Western democracies, and malicious cyber activities.  Russian oligarchs and elites who profit from this corrupt system will no longer be insulated from the consequences of their government’s destabilizing activities.

(bold italics added)

In other words Russia is a bad corrupt country which does lots of bad things around the world of which the US disapproves.  Anyone in Russia who is rich (“an oligarch”) and is therefore “profiting from this corrupt system” is in some way responsible and risks being sanctioned irrespective of anything they do unless this changes.

The implication is that if they do not want to be sanctioned the “oligarchs” must overthrow Russia’s government.

The latest sanctions are therefore an incitement to a coup.  All other steps the US has taken having failed, Russia’s businessmen (“oligarchs”) are now being told that unless they engineer the overthrow of Russia’s government they will be sanctioned.

The first thing to say about this policy is that it is decades out of date.

There was a time in the 1990s when a small group of stratospherically wealthy and corrupt individuals really did control Russia’s government.

By way of example, most of the people who met in the Kremlin during the 1998 financial crisis to decide whether or not to devalue the rouble were not members of the government or even officials, and the meeting during which the decision was finally taken to devalue the rouble was chaired not by a government minister but by the former Acting Prime Minister of Russia Yegor Gaidar, who at the time was neither a member of the government nor an official, but who was merely an adviser of Russia’s President, Boris Yeltsin, who was at the time away reviewing the fleet.

The decision was in fact made by the same small group of wealthy and corrupt individuals who at that time really did control Russia’s government, meeting informally under Gaidar’s chairmanship, and not through the official structures.

It is not a misconception to call these individuals “oligarchs”.  In the 1990s that is exactly what they were.  The most politically powerful amongst them – Boris Berezovsky – was not even properly speaking a businessman.

That is not the situation in Russia today.  A person like Oleg Deripaska – the aluminium magnate whose name appears on the latest sanctions list – may be a person of great influence and power.  However he does not control Russia’s government, and has no means to do so.

I should say that I first came across the suggestion that the “oligarchs” could be mobilised to overthrow President Putin or force him to reverse his policies by imposing sanctions upon them in early 2014 at the start of the Ukrainian crisis.

As I recall reports appeared in the media that the German intelligence agency the BND was advising Chancellor Merkel that if the EU imposed sanctions on Russia the “oligarchs” would either force President Putin to change course or would overthrow him in order to save their fortunes.

Many rounds of sanctions later one might suppose that that theory had been tested to destruction.  However Steven Mnuchin’s statement suggests that faith in it dies hard.

The latest round of sanctions the US has imposed on Russian businessmen and their companies will not weaken President Putin’s position or that of the Russian government, and will not affect Russia’s economy.

As China’s semi-official English language newspaper Global Times has recently pointed out, Russia – unlike countries like Iran – has a big largely self-sufficient continental sized economy possessing immense scientific, technological and natural resources, making it therefore largely immune to sanctions.

As for the wealthy Russian individuals who the latest sanctions are targeting, the reason so many of them keep money abroad is not because they control Russia’s government, but because they do not control it, and do not wholly trust it.

The result is that they have been squirrelling away much of their money abroad, beyond their government’s reach.

Now what they are discovering is that their money is at far greater risk of being seized by the US government than by their own – something the Russian government has been telling them for years – so that it is in fact safer kept at home than it is squirrelled away abroad.

In other words the latest sanctions and Steven Mnuchin’s statement could not have played more completely into the Russian government’s hands.

With Russian businessmen being told that the money they have squirrelled abroad may be seized irrespective of what they do unless they overthrow the Russian government – something which Russian businessmen know is beyond their power and is therefore impossible – they have no realistic option if they want to keep their money safe than to bring it home.

It seems that even before Mnuchin’s statement and the latest round of sanctions that is what some of them were doing.

A few weeks ago – before the Skripal crisis – a group of Russian businessmen in London wrote to President Putin asking for permission to return home with their money because of the threats they were facing; whilst the Russian government’s latest eurobond sale, which was specifically addressed to Russian businessmen, was heavily oversubscribed as they rushed to buy bonds issued by their own government.

The latest sanctions and Mnuchin’s statement will only accelerate the process.

A policy which only strengthens Putin’s position – forcing Russian businessmen to repatriate their money to Russia and increasing their dependence on the Russian government – looks completely counterproductive, and on the face of it that is what the US’s sanctions policy is.

However there may be more than one agenda at work.

The Russians are complaining that one of the purposes of the sanctions is to block Russian arms exports, a field in which Russia has recently been encroaching on US markets, such as Turkey and Saudi Arabia, and even farther afield, to countries like Indonesia.

There is of course a political dimension to this in that arms sales tend to bring closer political ties, and the US may be especially leery of US allies like Turkey and Saudi Arabia buying arms from Russia because of the danger that this might increase Russian influence there.

However attempts to block the arms sales of a major competitor on the international arms market does have something of a look of protectionism about it, which is not altogether surprising given the recent protectionist steps being taken by the Trump administration – especially with respect to China – and the importance of arms sales not just for the US economy but for individual US companies.

With China and Russia now increasingly cooperating in aircraft development, including their planned wide body airliner, with both China and Russia producing advanced and competitive narrow body airliners (the Comac C919 and the Irkut MC-21), and with Russia advancing with its development of the new Perm family of civil aircraft engines, which are capable of powering all these aircraft, it is also understandable that the US might wish to sanction Russian arms makers given the strong linkage between arms manufacturing and the civil aircraft industry.

Just as the latest US tariffs on China seem intended – at least in part – to obstruct development of China’s artificial intelligence industry, so the latest sanctions on Russian arms makers may be intended to obstruct development of the Chinese and Russian aviation industries – and especially of Russia’s civil aircraft engine industry – given the threat these industries pose to the position of the US in the international aviation market where the US has long enjoyed market dominance, and which accounts for a significant part of its exports.

If Russia’s and China’s nascent aviation industries are one of the ultimate targets of the latest sanctions, then that might also explain the sanctioning of Oleg Deripaska, the chief executive of RUSAL – Russia’s giant aluminium conglomerate – aluminium being of course a key material used in aircraft building.

It should be said however that there may be multiple other reasons why Deripaska – one of the most powerful and toughest of all Russian businessmen – has been targeted for sanctions.

If sanctions really are evolving into a tool to protect US positions in key industries such as artificial intelligence, arms manufacturing and civil aviation, then that I suspect will surprise no-one.

All I would say about that however is that in that case the US has missed the bus.  The sort of protectionist measures the US is imposing on China, and the sort of sanctions the US is imposing on Russia, would have devastated both the Chinese and Russian economies two decades ago.

By now – as Russia’s resilience in face of sanctions shows – both the Chinese and the Russian economies have achieved a level of sophistication and size that makes them essentially impervious to these sort of actions.

By way of example, though China’s exports peaked at over 37% of its GDP in 2006, by 2016 that had fallen to under 20%.  Today the major driver of China’s economy is internal demand, just as the main driver of Russia’s economy after 2020 will be investment.  Neither can be affected by the protectionist actions or sanctions the US is taking.

This is all the more so as China and Russia – and especially China – press ahead with constructing their own alternative international financial architecture (eg. the so-called “petro-yuan“) to underpin their economies, and the trading systems which they are constructing