Interview with sanctions expert David Lektzian: on the impact of sanctions, crisis in Ukraine and economic confrontation between West and Russia

By Rimvydas Ragauskas

David Lektzian is an Associate Professor in the Department of Political Science at TexasTechUniversity. His research interests are focused on the use of economic sanctions. His articles appeared in the American Journal of Political Science, International Studies Quarterly, Journal of Conflict Resolution, Journal of Peace Research, etc. David Lektzian spent 2014 spring semester at the Institute for International Relations and Political Science (Vilnius) where he was teaching a course on trade, conflict, and economic statecraft.

 

Professor, thank you very much for this interview. Indeed events in the international arena – first of all, crisis in Ukraine and international pressure on Russia – put sanction debate at the forefront. As you know, since the beginning of the crisis in UkraineLithuania was one of the main advocates of imposing firm EU economic sanctions against Russia. However, the EU leaders for a very long time, even after the tragic shot down of Malaysian Air flight (MH 17), were very hesitant and seemingly couldn’t find common ground on what kind of measures should be implemented against Russia. Eventually third round of by far the most firm sanctions was imposed. This really opens the ground for a wide discussion regarding ongoing dynamic between Western countries and Russia. We will of course get into these more detailed considerations but let’s start with a couple of more general questions that are very important in order to understand the essence of sanctions.

 

When we talk about sanctions, I think that it is crucial to consider a few general issues: What kind of outcomes can be expected from sanctions? How are they supposed to work? And what kind of internal pressures sanctions suppose to create in the target country, in this case Russia?

 

(Response by David Lektzian in plain text)

 

Well, the traditional, or naïve, thinking about sanctions was always that they work by placing economic harm on the citizens of the targeted country. As a result, the affected population of the targeted country was expected to demand changes from their leadership in order to get the sanctions lifted. I think we have moved quite a way from this initial logic. For example, the sanctions against Russia have been very carefully planned by both the U.S. and the E.U. The intent is not to impose massive economic harm on the general population of Russia. Rather, the sanctions have been targeted at individuals believed to be key players supporting Mr. Putin’s regime. Additionally, sanctions have been strategically aimed at the banking and energy sectors to cause harm to the elite actors in the Russian economy. However, even with this level of precise targeting Mr. Putin has been able to use the sanctions to help rally support around his administration. One of the main problems with broad based sanctions has always been their propensity to lead to rally effects that benefit the targeted government. This is particularly problematic with non-democratic leaders, and specifically those with a lot of control of the media. Mr. Putin has clearly been able to use the sanctions to stir up anti-Western sentiment and increase support for his policies. 

 

All of that said, the sanctions are still likely to have a tremendous effect on the Russian economy if Mr. Putin does not change his policies. The problem is that when the interests of individual leaders do not necessarily align with the general interests of the population these economic penalties are unlikely to bring about policy change. There is reason to believe that Mr. Putin is personally benefiting from the sanctions while the Russian people will suffer in the long term.  His popularity is increasing and he is able to wield political power that he would not have under normal times. For example, with around 30 percent of Russians being involved in the domestic agricultural business (either directly or indirectly), blocking imports of foreign agricultural products could be seen very favorably by a large number of Russians even though it could contribute to inflation and rising food prices for others. Without the crisis of Western sanctions, he could never institute such sweeping changes domestically.

 

Would you agree that very often media and even political elites misjudge possible outcomes of sanctions? For example looking at the crisis in Ukraine, it is often believed that EU sanctions can make V. Putin change his policies. Can we really expect that EU and US sanctions can provide a “quick result”, meaning that firm economic sanctions could possibly make V. Putin to shut down support for the terrorists in the Eastern Ukraine? Or are we rather looking at a very different long term goals that EU and US sanctions have to reach: weakening Russia in the long term so it cannot divert its aggressive policies towards other neighbors, sending a strong signal to international community that the EU (as well as the US) will not tolerate the violation of international law, sending a strong signal that EU is capable to react firmly towards Russia, etc.?

 

I think you are right on this.  The way I see it, the U.S. and EU have three basic policy options that could be used in response to Russia’s activities. They could use diplomatic condemnation and discussions. They could use some type of military intervention, most likely in a limited scale.  Or, they could use economic sanctions. Diplomacy and the use of military force are both likely to be far too costly. Diplomacy carries a steep cost in that it sends a message of either tacit approval for Russia’s actions or it reveals the West as having no ability to even attempt to change events of this type – even if they are occurring on the borders of the EU. This would send a strong message to Russia and the rest of the world that the US and EU do not have the will to get involved in these types of crises. The use of military force, of course, also carries extreme costs. Additionally, the prospects for successful use of force by the US and EU/NATO in Crimea and Ukraine may not be that much greater than the likelihood of successful sanctions. Generally, I agree with the argument articulated by David Baldwin in his treatise on Economic Statecraft. In that book, Baldwin reasons that sanctions do not need to be a “successful” policy in terms of being able to change the policy of the target for them to be the “best” policy choice available. It may be that none of these policies, diplomacy, sanctions, and military force, have a very high probability of coercing Russia to change its policies toward Ukraine. However, sanctions probably have as good of chance as the other two options and they come at a much lower cost to the sender nations.

 

Professor, it seems that for a long time EU reaction (or rather hesitation to react adequately) to the events in Ukraine, and especially the shot down of MH 17, was hardly understandable. After the MH 17 tragedy former US ambassador to Ukraine Steven Pifer pointed out very accurately that “outrage is not a policy” so the EU (and also the US) has to decide how they will react because inaction will further encourage Russia to support terrorists in Eastern Ukraine. What kind of message the EU sends about itself and priorities of its member states by being so hesitant and acting as if EU member states and not Russia are more vulnerable economically?

 

I think the EU and the US are playing their sanctions cards well in this crisis. I think it was important to give diplomacy a chance while making it clear that sanctions were coming if Russia did not stop supporting pro-Russian separatists in Ukraine. The EU and US have both clearly articulated the threat of increasing sanctions, and generally carried out those threats in accordance with the timetables set out.  Sometimes the threat of sanctions can be as powerful as their implementation as businesses and markets have a difficult time coping with the uncertainty surrounding future sanctions that could be imposed.  In this case, the threats did not work and neither has their implantation up to this point – although we need to give the sanctions time to see what their effect will be. In other words, I think sanctions like these are a big step and they need careful planning before rushing into them. With the intricacies of the global economy, states need time to consider unexpected consequences of their sanctions. The fact that the EU and US are attempting to impose the sanctions in a way that they will not greatly affect current levels of energy supplies to Europe, but will impair Russia’s long term gains from energy exports by targeting technology takes time to plan.

 

It seems that the last round of the EU and the US economic sanctions can make some real damage to Russia’s economy. Could you please share your thoughts on the last round of sanctions imposed by the EU and US and also countermeasures (ban on food imports) undertaken by Russia?

 

The current plan of trying to hit the defense, banking, and oil sectors and attempting to prevent access to technology that will prevent Russia from tapping into deep water, Arctic, and shale oil resources seems to be a smart one. The fact that the 28 members of the EU could come together and agree on these sanctions despite the fact that many of the key member states have such large dependencies on Russian energy sources shows just how serious they are taking Russia’s actions.  The fact that Russia has responded to these sanctions by cutting off all agricultural imports from the EU, US, Canada, and Australia is also quite interesting. These sanctions could potentially have a bigger impact on the daily lives of Russian citizens by banning food products. This is precisely what the West was avoiding with its targeted banking, energy, and defense sanctions. While the West was smart enough not to impose sanctions in a way that has traditionally lead to large rally effects in favor of targeted governments, Mr. Putin may be trying to make those rally effects happen anyway. It will not be hard for him to blame any negative repercussions of his agricultural sanctions on the sanctions war that the West started.

 

Another aspect that seemingly became very evident during the crisis in Ukraine – global financial markets are actually the ones that are severely punishing Russia for its aggression (capital outflow, high interests rates, weakened ruble, etc.). It seems that the global markets have no independent moral compass and so their reaction is based on the expectations of what countries will do. So sometimes even threatening with sanctions (even without imposing themlatter on) can have significant economic consequences for a target country. At the same time, if sanctions are imposed (especially the firm ones) then markets also react negatively and so this way the target country gets double punishment (and effects are evident even in the sectors that are not sanctioned). What role do global financial markets play in the sanction debate?

 

I think the jury is still out on the question of whether global financial markets actually punish countries for initiating conflicts.  I have seen studies showing that markets have punished states for involvement in conflict and some that have shown that certain states (the U.S. being one) may actually benefit from involvement in conflict. 

 

Certainly, you are correct that markets have no real moral compass. Fund managers may try to reflect the morals of their investors, but the bottom line is that when there is money to be made investors will come. What the EU and US will try to do is to impose sanctions that increase uncertainty around investment in Russia. We have seen this already. After the EU and US imposed technology sanctions on the oil sector, Exxon Mobil was unsure how the sanctions would affect their Arctic venture with Rosneft. A British Petroleum executive was quoted after the imposition of this third stage of sanctions as saying that “Technology is a very hard thing to define.”  Western oil companies will, no doubt, have teams of lawyers pouring over the new sanctions regulations to figure out what they can and cannot do.  While the sanctions may not stop investment, they seem certain to slow it.  We also have to consider the effect of the record setting $8.9 billion fine levied against French bank BNP Paribas for helping countries like Sudan evade sanctions. These types of rulings should make firms skittish about skirting the edges of sanctions law to invest in Russia and should have an overall negative effect on the Russian economy.

 

As far as evidence, so far, of the markets punishing Russia, I don’t see a clear trend. I have seen the market fall, then rally, then fall and rally again.  Sometimes Russian stocks and currency fall, sometimes US stocks and currency fall. I have not studied it extensively, but I have not seen clear evidence that Russian markets have been singled out and punished in a way that appears to be connected to the activity in Crimea and Ukraine.  For example, in mid-July Russia's benchmark MICEX index was down 2.7 percent and the ruble fell 0.9 percent against the dollar. But on the eve of the enhanced EU sanctions, on July 30th, the MICEX was up 2 percent and on August 1st, just after the toughening of sanctions, Western indices, like the S&P, Dow Jones, and Nasdaq all dropped 2 percent.  Around a week later, these major indexes all dropped by about another 1 percent. At the same time, Daniel Drezner, in a Washington Post Blog reported that foreign direct investment flows to Russia in 2014 would fall to half of their 2013 values as capital worth $75 billion had already departed the country in 2014.  So who are markets punishing? The West, Russia, both, neither, I’m not really sure there is clear evidence at this point.

 

In your opinion how important is “timing” for the success of sanctions? Hypothetically speaking if we look retrospectively we can probably speculate that if the EU and the US would have reacted firmly by imposing strict sanctions at the very beginning of the Crimean crisis (when Russia’s support for the separatists in Crimea became evident) the situation today could have been different. By this I mean that back then sanctions could have had the effect of “deterrence”. While now – when the conflict is escalated to the point where any concessions by Russia will be perceived as its loss, and, let’s be clear, Russia doesn’t like to lose or to look week and V. Putin is very popular in Russia – Western countries are put against the fact and sanctions are more of the reactive nature and designed to punish Russia for its policies but really are incapable of changing them (rather opposite – Russia answers by imposing political and economic countermeasures). In your opinion can we still talk about scenario where there is still a backup plan for V. Putin in which he can save his face but at the same time make sufficient concessions regarding Ukraine question? And finally does the mismanagement of the Ukraine crisis provide any lesson that Western leaders should learn?

 

I am not totally in agreement that the sanctions were mismanaged by the West.  There are a lot of strong theoretical arguments that say that if sanctions are going to work they are likely to work at the threat stage. If a leader weighs the damage that you threaten to impose through sanctions and is unwilling to comply, then he/she is generally unlikely to comply once the threat has been carried out.  I don‘t think that Mr. Putin was particularly worried about what it was that the West was threatening to do with sanctions, so I don‘t think he would have been any more likely to comply to the immediate implementation of sanctions than he was to comply to their threat. Also, the West did try to give Russia a face saving option early on in the conflict when Obama proposed to send European observers to take the place of Russian forces in Crimea to guard against the supposed threats to the Russian-speaking population cited by the Kremlin as justification for its intervention.

 

I think that Mr. Putin plans to continue doing just enough to keep Ukraine unstable and to keep his options open for a chance to keep Ukraine from being lost to the EU. This whole crisis started when it looked like Ukraine would sign an accord that would open the EU market to tariff-free exports from Ukraine in exchange for gradual work toward bringing regulations up to European standards on a path toward consideration for entry into the EU.  Ironically, at the end of June of this year, Ukraine signed the same agreement that touched off all of the controversy back in November of 2013. 

 

While I don‘t see Putin backing down in the short term, at some point his domestic rally support is likely to falter. This is likely to happen if the sanctions start to impose costs on the Russian economy, which I believe they will, and if the crisis in Ukraine starts to dissipate. History has shown that rally effects do not last indefinitely. I believe that Mr. Putin will move to strengthen his power base during the crisis so that when his overall popularity starts to fall he will be less threatened by it. What is likely to happen over the course of the crisis is that Russia will become increasingly distanced from the West and the Russian economy is likely to suffer.  The size of Russia‘s economy and the desire for other actors to gain access to it will cushion the impact of the sanctions. Brazil and China, for example, seem to be more than happy to make up for any shortages in agricultural goods as a result of Russia‘s sanctions on the West.  However, Russia will have a harder time finding replacements for the prohibited oil technology and access to Western capital. 

 

Now that the sanctions have been imposed by the West and resisted by Russia, it will be interesting to see which side backs down first. Western leaders will face high costs from their consituents if they back down from sanctions without achieving some form of concessions from Russia. But, it will be hard for the 28 diverse members of the EU to remain united on the issue of sanctions if the standoff plays out for months or even years.  Mr. Putin could be counting on this. On the other hand, it may be Mr. Putin who is in a better position to make a deal since he is not officially supporting the pro-Russian rebels in Ukraine. Currently, however, he has no real incentive to back down since the sanctions, in part, are driving his increasing domestic popularity.

 

Professor, thank you very much for your time.

 

Thank you very much for your thought provoking questions. I appreciate the opportunity to sit down and chat with you and your readers about these issues.

 

 

Geopolitika

 

 

01.09.2014

 

 

 
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