Russians Know U.S. Sanction Threats Are a Joke
As Russia President Vladimir
Putin consolidates his military hold on the Crimean Peninsula, President Obama signed
order suspending certain Russian visas and allowing the Treasury
Department to impose financial sanctions on individuals and entities for “misappropriating state assets of Ukraine.”
Both Houses of Congress are also drafting financial, trade, and other sanctions against Russia. This follows the
speech by U.S. Secretary of State John Kerry March 2 that the Group of Eight (G8) and a number of countries are “prepared
to go to the hilt to isolate Russia.” But given that retaliation
from the Russians would cause more pain to American businesses and might freeze
Europeans to death, the Russians know U.S. sanction threats are a joke.
Only 2% of Russian
exports went to the U.S. in 2013, including $19.3 billion in petroleum and $1
billion in nuclear power plant fuel. Despite
Russia’s protectionist policies against imports that would compete with local
industries, the U.S. enjoys a substantial trade surplus with Russia. About 4.9% of Russian imports come from the
U.S., including civilian aircraft, autos, chemicals, and meat and other
agricultural products. Russia is less
than 1% of U.S. export volume and the U.S. is less than 4% of Russian export volume. Everything in the bilateral trade
relationship can be sourced from other nations.
Russia does not
leave much of its wealth in American hands, because Russian banks and financial
institutions have relatively little exposure to the U.S. banks. At the end of 2013, Russia had $750 billion in
deposits in Russian banks and only $20.2 billion deposited in in U.S. banks. U.S. investors do hold $56 billion of Russian
stocks (6% of $870 billion total market capitalization), but there already was substantial
selling of these shares since February 28th, when the Russian
market fell by 11% in a single day.
U.S. government could force American mutual fund and individual investors to
immediately divest of Russian stocks, but this would cause big losses for Americans
forced into distress selling. Any market
drop would be temporary since most private and state-owned Russian companies listing
on foreign stock exchanges tended to register on the London Exchange or the Frankfurt
The Russian ruble
currency has slumped during the Ukrainian crisis, but the U.S. Federal Reserve does
not keep rubles as reserves they could dump. The CIA could solicit private Wall Street firms to drive the currency
down, but coordinated action would violate the U.S. Securities
Exchange Act of 1934 and set a horrible precedent for insider trading. The Russian Central Bank has been spending $11
billion a day to support the ruble, but they have very deep pockets with $658
billion in foreign currency reserves.
After 85 years of
protectionist policies, Russia had begun signing joint-venture deals with foreign
firms. According to Stratfor Intelligence
report, the UK’s BP now holds a 20%
stake in Russian state-owned Rosneft and the French company Total has a 14%
interest in Novatek, the largest independent gas producer in Russia.
U.S. based ExxonMobile
billions of dollars of deals in the last two years, including a $2 billion joint venture
with Rosneft in Black Sea and a $15 billion liquefied natural gas facility at the
Siberian port of Vladivostok. Rosneft
also owns with ExxonMobile 30% of a field in West Texas, 20 exploration
concessions in the Gulf of Mexico, and a 30% stake in the West Canada Basin. The projects are designed to demonstrate to Russia
the advantages of using American technology to explore and develop unconventional
shale and tar sands resources.
firms from joint ventures would cause contractual defaults and tie up the American
properties in litigation for many years. Russia would probably nationalize foreign assets, and U.S. exporters of
drilling equipment and oil services would scream at Congress for destroying jobs
in America. Furthermore, Europeans who rely
on Russian energy for 30% of their needs run the risk of Russia cutting off
Russia would also sting Boeing, which invested $7 billion in Russia over the
last decade and has plans to invest another $18 billion over the next 7 years
to gain a steady supply of titanium as a key to Boeing's future competitiveness. Russia’s state-owned commercial airlines
currently have 100 planes from Boeing, and the company was expecting significant
The Duma, Russia
legislature, is already drafting laws that would give President Putin the power
to retaliate against enactment of economic sanction by confiscating property,
assets and accounts of U.S. companies. Russia could also shut-off natural gas flow to
Europe, but this action would have to be short lived since their economy relies
almost exclusively on foreign currency from energy sales.
The ultimate revenge by Russia would be to withdraw from the Intermediate-Range Nuclear Forces Treaty, which limits the maximum range
of U.S. and Russian missiles, or the Strategic Arms Reduction Treaty, which reduced
the total number of nuclear weapons in each nation’s arsenal. But such action would spark a wildly expensive
arms race with America.
Vladimir Putin and the Russians have managed to humiliate President Obama
and demonstrate to their former members of the Soviet Union that the U.S. and Europe
lack the military capability and the stamina to challenge the new Russia. I
believe that the Putin will seek a settlement to the crisis from the position
of strength he now holds. The Russians know U.S. economic sanction threats
are a joke.
The author welcomes feedback @ email@example.com.
Chriss Street is teaching microeconomic at University of California, Irvine
this spring from March 31 – June 8, 2014. Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to