The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.
Though it has gone almost entirely unreported in the Western media, a report provided by a UN Special Rapporteur to the UN Human Rights Council appears to the first serious attempt by an international authority to assess the effectiveness of the sanctions the Western powers have imposed on Russia.
The report’s conclusions are that the sanctions have been ineffective in that they have done only marginal damage to the Russian economy and have been significantly more costly to the EU’s economy than to Russia’s, though they have caused real hardship to many individuals both in the EU and in Russia.
Most controversial of all, the report casts doubt on the legality of the whole sanctions regime imposed by the West on Russia.
On the possible illegality of the EU’s sanctions, I discussed this as far back as 2nd October 2014 in an article I wrote for Sputnik in which I made these points
There is only one international body that is authorised under international law to impose sanctions: the Security Council of the United Nations. Its authority to impose sanctions is clearly set out in Article 41 of the UN Charter …….Any decision by the UN Security Council to impose sanctions under Article 41 has the force of law. UN Member States (including the states that make up the EU) are legally bound to enforce them.
The EU has no international legal authority to impose sanctions without obtaining a mandate from the Security Council. Doing so challenges the authority of the Security Council to impose sanctions. It also violates the rules of the World Trade Organisation.
The EU nonetheless claimed for itself this power in a 2004 position paper: …….The position paper however fails to explain the legal basis upon which the EU claims this power. It refers to Article 11 of the Treaty on the European Union. This is has been replaced by Articles 21 and 24 of the amended Treaty on the European Union. Neither the original Article 11 nor Articles 21 and 24 of the amended Treaty on the European Union, however, refer to sanctions.
Reference is sometimes also made to Article 28 of the Treaty on the European Union, …..Reference is also made to Article 215 of the Treaty on the Functioning of the European Union, …..None of these provisions however say the EU has the power to impose sanctions without a mandate from the Security Council.
Compare these words in my article for Sputnik of 2nd October 2014 with these words in the report of the Special Rapporteur
10. Unilateral sanctions against the Russian Federation qualify as “unilateral coercive measures” to the extent that they have been adopted by States — or regional organizations without a mandate of the Security Council acting pursuant to Article 41 of the Charter of the United Nations (see A/HRC/30/45, para. 14).
11. It has been rightly noted that “[t]he prevailing view among international law specialists, however, is that autonomous sanctions cannot be legal per se and thus require international legal justification for their imposition”.
12. Sanctions on the Russian Federation should be expected to comply with the procedural and substantive conditions for recourse to lawful countermeasures, as set out by the General Assembly in its resolution 56/83 on the responsibility of States for internationally wrongful acts. In particular, the International Law Commission has noted that a “State which resorts to countermeasures based on its unilateral assessment of the situation does so at its own risk and may incur responsibility for its own wrongful conduct in the event of an incorrect assessment”.
13. Moreover, as the Special Rapporteur noted in his 2016 report to the General Assembly, “[s]uch responsibility could also be engaged in a situation where, even acting with proper justification, States (or international organizations) are found to have disregarded legal preconditions for recourse to countermeasures, such as the proportionality and reversibility of the measures” (see A/71/287, para. 11).
14. The view has been widely expressed that unilateral sanctions on the Russian Federation qualify as “third-party countermeasures” under international law, to the extent that they aim at responding to grave violations of obligations owed to the international community. However, it is to be noted that the permissibility of third-party countermeasures remains unsettled in international law, and was left open in General Assembly resolution 56/83.
(bold italics added)
In other words, since the sanctions were not imposed by the UN Security Council their legality is open to doubt, even if they are viewed as “third party countermeasures”, the legality of which is anyway “unsettled”.
To which I would add that as the Special Rapporteur’s discussion clearly shows, “third party countermeasures” are envisaged as unilateral actions (ie. actions taken without a mandate from the UN Security Council) taken by UN Member States. The EU however is not a UN Member State but an international body, and its power to act is theoretically limited by the treaties which created it. As I discussed in my article for Sputnik, none of these treaties give it authority to impose sanctions which have not been mandated by the UN Security Council.
Putting aside the important though for the moment academic question of the legality of the sanctions – which may however become very important at some future time – what of their actual economic impact?
The Special Rapporteur has much to say about this, and it will make for uncomfortable reading for the supporters of the sanctions
51. Application of the unilateral coercive measures began at the start of 2014, a time when the price of oil fell substantially. Thus, two shocks occurred simultaneously: the “oil shock” and the “sanctions shock”. In view of the complexity of the mix of those causes, it is difficult to determine the discrete impact of the sanctions shock. According to some unofficial estimates provided to the Special Rapporteur in Moscow, they may have caused at most an average reduction of 1 per cent of the gross domestic product (GDP) of the Russian Federation between 2014 and 2016. It remains that the main adverse impact of the reversal of economic fortunes was attributable to the drop in oil prices……
53. In terms of macroeconomic analysis, the combined impact of the two shocks reduced growth from 1.3 per cent in 2013 to 0.7 per cent in 2014 and to – 2.8 per cent in 2015. As a result of adaptation to the post-shock situation, there was a turnaround in economic activity already in the first quarter of 2016, with a negative growth rate of – 0.02 per cent, despite the fact that oil prices remained low. That rate moved back into positive territory in 2017 without any lifting of unilateral coercive measures. Over the past 12 months, the rouble appreciated by 15 per cent against the dollar. This is evidence of a successful adjustment…….
62. Different data are provided by the media and academic circles in source countries estimating the cost incurred through the measures by source countries, especially in the European Union.
63. The most credible approximation is of $3.2 billion a month, according to a working paper by the Centre d’Etudes Prospectives et d’Informations Internationales. In an interview with the Special Rapporteur, European farmers and a confederation of European agricultural cooperatives deplored that the losses were attributable to a political dispute between the European Union and the Russian Federation, in which European Union farmers had no role or responsibility yet were the ones that had to “pay the price”.
64. The rough estimate of the adverse impact of the sanctions on the Russian Federation, if disentangled from the oil shock, is an average loss of 1 per cent of GDP. That seems to be a reasonable figure since, after “digesting” the oil shock, the difference between actual and potential GDP for 2017 is of about 0.80 per cent according to the International Monetary Fund. That output gap would amount to a direct loss therefore of some $15 billion per annum for the Russian Federation or a total of $55 billion so far.
65. The resulting overall income loss of $155 billion is shared by source and target countries. Although both source and target countries can internalize those losses, it is not clear that any partner is cowed by them or indeed that any rights holder, least of all European smallholder farmers, benefits from them. Meanwhile, business opportunities are forgone, curtailing the right to development of trading partners. Even if direct losses to the Russian Federation from unilateral coercive measures were twice as high as provided in the above estimate, source countries are having to suffer equally or more from the sanctions than the country they target. They may also be more vulnerable as, unlike the Russian Federation, they do not all have a consistent international trade surplus or such high foreign exchange reserves, which, in the case of the Russian Federation, remained consistently above $300 billion since sanctions were applied.
(bold italics added)
In other words the best estimate the Special Rapporteur has found of the cost of the sanctions to the Russian economy, coming however from a European source, is that it is no higher than $15 billion a year, or $55 billion in total, which is less than 1% of Russia’s dollar denominated nominal GDP.
It turns out that the sanctions are actually costing the EU more than they are costing Russia: $100 billion since they were introduced, as opposed to the $55 billion they are estimated to have cost Russia.
Whilst this constitutes a smaller fraction of the EU’s GDP as compared to that lost by Russia – the EU’s GDP being much larger than Russia’s – the burden is falling unequally on the EU’s weaker member states, some of whom lack Russia’s depth of financial resources, whilst it is hitting certain sectors of the EU’s economy – such as the EU’s agricultural sector – disproportionately, with EU farmers complaining that they have been caught in the crossfire of a political quarrel in which they have no part.
The assessment that the sanctions have shaved off about 1% of Russia’s GDP is probably correct, but it needs to be heavily qualified.
The sanctions did cause the Russian economy real problems in the late autumn of 2014, when Russian companies found themselves facing heavy loan repayments on their foreign debt at a time of a cash shortage and a declining rouble caused by the oil price fall. With Western creditors refusing to roll over loans there was therefore a rush to convert roubles into euros and dollars to repay the loans, increasing the downward pressure on the rouble still further, and causing it in late December 2014 to crash.
The Central Bank and the Finance Ministry however acted quickly to plug the gap – which because of the size of their reserves they could easily do – so that after a brief wobble the situation was quickly brought back under control.
Since then the main effect of the sanctions has been to force Russian companies and banks to continue paying off their foreign debt more quickly than they would otherwise have done, with however nothing remotely like the temporary payment crisis of late December 2014 ever happening again.
Whilst this process of paying off debt has no doubt kept the rouble lower than it might otherwise have been, and has undoubtedly reduced investment in the Russian economy whilst it has been taking place, its ultimate effect once the loan repayment process is completed will be to leave Russian companies unburdened by debt, and therefore in a much stronger financial position going forward than the one in which they would otherwise have been if the sanctions had never been imposed.
With the Central Bank claiming that Russian banks will have paid off their foreign debt by the end of this year, this deleveraging process now looks to be drawing to a close, which is no doubt one reason why despite the continued high interest rates there has been a significant investment recovery in Russia this year.
In other words the effect of the sanctions on the Russian economy was to deepen what was by Russia’s historic standards still a relatively shallow recession caused by the oil price fall. However they have also made the Russian economy come out of the recession in a better condition than the one it would have been in if they had not been imposed.
The result is that though Russia’s economy may be 1% smaller today than it would have been if the sanctions had not been imposed, the sanctions have created the conditions which will cause Russia’s economy in future to grow faster, and become bigger and stronger, than would have been the case if the sanctions had not been imposed.
Of course all this would not have happened if economic policy had not been competent and successful. Here is what the Special Rapporteur has to say about that
55. The reasons why the impact of economic sanctions on the enjoyment of human rights was not more severe in the country seem related to the following facts:
(a) The Government applied very effectively a counter-cyclical policy by letting the rouble float and by increasing the share of the State sector to substitute for the sanction imposed ban on foreign funding for the corporate sector beyond 30 days, by reducing considerably the rate of inflation through conservative management of the economy and by ex-post compensation of inflation losses incurred by pensioners;
(b) The economy demonstrated great resilience and a capacity to adapt to new circumstances through Government-assisted restructuring to promote local funding of projects formerly funded by external sources;
(c) The diversification of the economy away from oil was given new impetus;
(d) Emphasis on research was increased, returning to an earlier stage when, in many sectors, including space technology, the Russian Federation was at the forefront (it should be noted that, according to Russian officials, cooperation with the United States in advanced space technology was maintained, including for the supply of engines for spacecraft, despite the ban on the export of advanced drilling technology by the United States); this enabled the Russian Federation to enhance its oil production in the Arctic by developing its own capacities for horizontal drilling and its production of shale oil, for which it had previously relied on foreign partners;
(e) Effective import substitution technologies were put in place, in particular in agriculture, to dispense with imports from the European Union that were the subject of retaliatory measures;
(f) A policy was quickly introduced to pivot towards other partners in Asia and other regions.
To this list of measures I would add the further measures the Russian authorities have taken since the sanctions to strengthen Russia’s financial system, which is the Achilles heel of Russia’s economy. These measures require a separate discussion, but briefly the high interest rates to reduce inflation and encourage saving, and the Central Bank’s clearing up of the banking system through its policy of closing down Russia’s weakest banks, are just two.
These measures to strengthen the financial system are essential if the financial system is to fund Russia’s economic growth in the future, as in the absence of large scale investment from the West it will have to do. They are the government’s and the Central Bank’s main priority at the moment.
The key point to grasp is that these steps – which are putting Russia in a better position to grow its economy in future – have in part at least been induced by the sanctions, and would either have been delayed or would not have happened at all without them.
One of the great paradoxes of the sanctions is that instead of weakening Russia they have provided the Russian government with the political cover to do things it needed to do, such as float the rouble and limit food imports, and which it probably had long wanted to do, but which it was previously too frightened to do because they would have been unpopular with certain influential sections of the population.
In his report the Special Rapporteur briefly touches on this
56. As in many other countries targeted by sanctions, there was a “rally around the flag” reaction, which led the population to accept the inconveniences caused by the unilateral coercive measures.
All of this calls into question the underlying assumption upon which the sanctions were based.
Briefly Western policy makers grossly underestimated the size, sophistication and flexibility of the Russian economy when they imposed the sanctions, and assumed that the sanctions would cause the Russian economy to go into a tailspin, forcing President Putin to back down over Crimea and Ukraine or risk popular protests or even an oligarch led coup. Instead, as the Special Rapporteur’s report shows, the Russian economy has successfully adjusted to the sanctions, whilst President Putin’s popularity remains at stratospheric levels.
Western policy makers made this mistake because their views of the Russian economy and of Russian society were formed during Russia’s ‘disaster years’ of 1989 to 1998, with their negative perceptions since then reinforced by the relentlessly negative and often grossly inaccurate way news about Russia is reported by the Western media and the West’s intelligence agencies.
The Special Rapporteur briefly touches on this
58. The Russian case study offers an opportunity to review the effectiveness of unilateral coercive measures applied by large advanced economies against one another. The example of the Russian Federation demonstrates the expected versatility of a relatively well-off country with a variety of resources, a highly trained population and a multiplicity of trading partners……..
60. In a context of globalization, for a country like the Russian Federation, which is fully integrated into the world economy, measures for trade diversion — whether through protectionism or through unilateral coercive measures — can be self-defeating if they lead to a “beggar-thy-neighbour” policy. It is fortunate therefore that the retaliatory measures themselves were limited in scope.
61. Furthermore, in such a globalized context, one must not lose sight of the possible backlash of unilateral measures, even without retaliation. Thus, for instance, one of the largest banks in the Russian Federation, Sberbank, has a part of its capital in equities of which one third is owned by foreign investors from sanctioning countries. Thus, when the bank cannot obtain foreign financing above 30 days for its clients, its profits are affected, which, in turn, reduces the price of its shares and causes losses for their owners also in source countries. Furthermore, every year the State floats internationally 10-year eurodollar bonds that are reserved for foreign purchasers and are heavily subscribed. In addition, every week it auctions other shorter-term bonds in roubles that are also subscribed by foreign buyers. Rationing of foreign loans to the Russian economy is therefore of limited effectiveness……
66. The wave of globalization that has engulfed the Russian Federation has spread the value chain across its borders with Europe and to a lesser extent has stretched to the United States. It is therefore becoming realistically impossible to disentangle the links of that value chain in a way that would introduce a clean cut of those links situated in the Russian Federation without weakening the rest of the chain through what has misleadingly been referred to come to as “surgically accurate” measures.
(bold italics in the original)
In other words, totally isolating an economy as large and sophisticated as Russia’s is realistically impossible, and would be completely self-defeating if it were ever attempted. Even the limited ‘targeted’ sanctions which were imposed on Russia have had negative effects on the countries which imposed them, and have been largely unsuccessful because of Russia’s “variety of resources, highly trained population and multiplicity of trading partners”.
I said that the UN Special Rapporteur’s report would make uncomfortable reading for the sanctions’ supporters, and so it has proved. The best indicator of this is that there have already been claims that Russia funded his report, claims which the Special Rapporteur has categorically denied .
What is true to say is that the Special Rapporteur – Idriss Jazairy – though obviously highly qualified – his UN profile reads as follows: “Mr. Jazairy has extensive experience in the fields of international relations and human rights with the Algerian Foreign Ministry, the UN human rights system and international NGOs. He was formerly the head of a UN specialized agency, IFAD. He holds a M.A. (Oxford) in Philosophy, Politics and Economics, and an M.P.A. (Harvard). He also graduated from the Ecole nationale d’Administration (France)” – is Algerian, and is therefore a citizen of a non-aligned country. That makes him less vulnerable to US disfavour than other officials of UN agencies who are citizens of countries aligned to the US.
This puts the Special Rapporteur in a similar position to that of the unnamed Indian army officer who headed the UN investigation into the attack on the humanitarian convoy in Syria near Aleppo on 19th September 2016, which effectively cleared the Russians of claims they had been involved in that incident.
The Special Rapporteur’s report should not of course be the final word on this question. As he himself says in his report, it is remarkable that the Western powers have failed to carry out a review of the effectiveness of the sanctions since they were imposed, even though the need for such a review is obvious
67. The unilateral coercive measures are intended to serve as a deterrent to the Russian Federation in the context of the prevailing political standoff in the region. They do however carry unintended effects on producers that have nothing to do with the situation, both in Europe and among the most vulnerable groups in the Russian Federation. The Special Rapporteur considers that, after three years of implementation of unilateral coercive measures targeting the Russian Federation, a review of their effectiveness in achieving their proclaimed goal is overdue.
68. The Special Rapporteur recommends that the review be engaged upon without delay in the search for effectiveness in the pursuit of desired outcomes and in a way that spares innocent civilians in source and target countries from unintended adverse human rights impacts.
Needless to say the reason no such review has taken place, or will take place, is because if it ever did take place it would simply confirm what the Special Rapporteur is saying in his report, which is that the sanctions are failing. That of course is a truth the supporters of the sanctions do not want to face.
I will finish this discussion of the Special Rapporteur’s report with two further observations:
(1) Though the sanctions have not hurt the Russian economy in the way their authors intended, they have as the Special Rapporteur has pointed out caused real hardship to the individuals they have targeted. Moreover it appears that this hardship is being aggravated by the unaccountable and arbitrary way in which they are being administered. The Special Rapporteur’s report provides an example
……..a Russian businessman whose spouse was hospitalized in a western European clinic, found out upon attempting payment of her medical bill that his western bank account had been blocked and could not be drawn upon even for such humanitarian items of expenditure. This is all the more surprising since competent European Union authorities are committed to taking into account the “fundamental rights of designated persons and entities when granting exemptions” as provided by the European Union Guidelines on implementation and evaluation of restrictive measures (sanctions) in the framework of the European Union Common Foreign and Security Policy.
Unfortunately there is practically no possibility that the Special Rapporteur’s report will cause the EU to review its procedures so as to change the harsh and arbitrary way in which the sanctions are being administered.
(2) Though the authors of the sanctions of course refuse to admit their failure, I have no doubt that in private there is much anger and frustration that they have not produced the results expected of them.
Though obviously I do not know this for a fact, I strongly suspect that part at least of the reason for the latest sanctions law recently passed by the US Congress is anger caused by the failure of the existing sanctions. As has now become standard (North Korea being another case in point) the response of those who called for the sanctions is not to admit their error and the failure of the sanctions but to demand more and more sanctions in the hope that that way they can be made to work.
The reality is that European opinion has now become too disillusioned with the existing sanctions to countenance significant further sanctions over and above the existing sanctions, especially given that the new sanctions which are being proposed would be directly contrary to the EU’s fundamental economic interests. In Germany at least the talk is now increasingly of the need for a roadmap so that the existing sanctions can reduced and eventually lifted. The recent German elections will only strengthen that talk.
Such talk will of course make the supporters of the sanctions even more angry, and even less willing to face the truth that the sanctions are failing, which is set out in the Special Rapporteur’s report.
That truth however cannot be denied forever. The only question is how long it will take before it is accepted. Past experience suggests that will take long.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.