The US Can’t Bring Russia ‘to its Knees’

Sunday, 26 August, 2018 - 10:15 Issue Number [14516]

The US’s sanctions policy against Russia is evolving from trying to nudge the Kremlin in a desired direction to inflicting maximum pain. This is a slippery slope, and it’s time to consider the most extreme consequences for Russia, as well as the US and its allies.

During a Senate Banking Committee hearing this week, a telling exchange took place between Republican Senator John Kennedy and the Trump administration’s senior sanctions officials.

Kennedy demanded to know what they would do if the president ordered them to bring the Russian economy "to its knees.” They wouldn’t give a straight answer, saying instead that the ramifications of such a goal would need to be assessed and that current sanctions were already aggressive. Irritated, Kennedy insisted: “But the economy hasn’t been brought to its knees!”

His frustration is understandable. The US has levied sanctions, or said it will, in response to a series of Russian actions: the annexation of Crimea, the fomenting of a pro-Russian rebellion in eastern Ukraine, the attempted poisoning of an ex-spy in the UK and a string of cyberattacks.

Treasury Undersecretary Sigal Mandelker said in her testimony that she believes Russia’s “adventurism” has indeed been checked by the economic pain the sanctions have inflicted.

Obviously, the US measures are a nuisance on several levels. They have triggered a drop in foreign direct investment from which Russia, despite its recent economic growth, hasn’t recovered. Some big energy projects have been set back by at least a few years. Then there’s the damage to wealthy Russians and their companies. It’s unclear how many of their assets have been frozen, but a US Treasury Department report to Congress this month put the number in the “hundreds of millions of dollars” in the US alone.

Anyone would like such problems gone. But Russia’s unapologetic stance, and the absence of any steps by President Vladimir Putin that could be interpreted as a peace offering, show that the Kremlin isn’t prepared to give any ground to get the US to step back. That creates the temptation in Washington to make such pressure overwhelming. Even if the Trump administration doesn’t want to go there, many legislators do.

In the most extreme case, Washington could impose the same kind of embargo as it did on Iran. That would make it impossible for any company with ties to the US to have any dealings with Russia. It could cut off all Russia’s banks from the dollar-based financial system and punish buyers of the country’s oil and gas.

Not even the most hawkish are willing to consider the oil and gas part of this option. Russia is the biggest natural gas exporter in the world and produces about three times as much crude oil as Iran. Removing it from the market would unleash a global energy crisis.

The Senate bill goes about as far as is possible without setting off such cataclysms.

Further restrictions against Russia’s energy and tech industries would likely mean reprisals for US companies operating in the country. The biggest 50, among them Philip Morris International Inc., PepsiCo Inc. and Procter & Gamble Co., have sales of about $16 billion there, according to Forbes Russia. The Kremlin has been as hesitant to declare war on these businesses as the last two US administrations have been to use maximum economic force against the Russian energy and finance sectors.

As the US begins to consider an all-out economic war, the two strategic questions it needs to answer are: what it is willing to pay to extract any concessions from the Putin government at all, and how long it is prepared to wait.

Macroeconomically, Russia, with unemployment at a record low, modest inflation and $400 billion of international reserves, is unlikely to collapse.

If less than maximum pain is applied, Russia could manage for years with relatively low growth. That is the basis for Putin’s calculations. It bodes badly for the current direction of US policy. If Washington inflicts as much pain as it can — and nothing changes — it will be a painful failure for the superpower.

Bloomberg