Opinion : Sanction means what to Russia Is this impactful like Iran?

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By Zakir Hussain

As the Russian tanks rolled into Ukraine, the US-combined allies slapped another round of sanctions on Moscow. In a ‘Joint Statement on Further Restrictive Economic Measures’, President Biden stated, “We, the leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States condemn Putin’s war of choice and attacks on the sovereign nation and people of Ukraine”…We are resolved to continue imposing costs on Russia that will further isolate Russia from the international financial system and our economies. The fresh round of sanction includes broadly three measures, first, removing selected Russian banks from the SWIFT messaging system, so they could not utilize global financial messaging system; second, limiting the sale of citizenship through golden passport that led the wealthy Russians connected to the Russian government become citizens of our countries and gain access to our financial systems; and, third, launching a transatlantic task force to ensure the effective implementation of financial sanctions by identifying and freezing the assets of sanctioned individual and companies and finally, stepping up or coordination against disinformation and other forms of hybrid warfare.

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The US has sanctioned two big Russian banks, VTB and Serbank, mostly dealing in US dollars.

This is the second round of sanctions imposed on Russia. First was imposed in 2014 by President Obama when Moscow annexed Crimea. Almost all the same countries had joined the sanctions conclave.

Sanction and Russia

Whenever the word ‘sanction’ against any country is announced, first Iran hits the imagination, visualizing the same kind of debilitating impact on the Russian economy and society –slump in national currency value, trade embargo, depleting foreign exchange reserves, galloping inflation; scarcity of investment capital, growing unemployment, resulting into social and political disquietude and making the situation ripe for mass revolt against the government in power.
Does Russia suffered all these it has been put under sanction since 2014? The fresh attack of Russia on Ukraine itself speaks volumes about the impact of sanctions on Moscow. Had sanction been bleeding and weakening Russia, both economically and politically, as it has done with Iran or even North Korea, would Moscow have courage and capacity to launch another full scale war against Kyiv and also been threatening the West Europe with atomic consequences if they come forward with their military sympathies to Kyiv?

Immediately as the Russian forces entered into Ukraine and sanctions announced, oil prices shot 11 years high, global Sensex plummeted, while commodity market shot up. Price of wheat jumped up, leading to food price inflation in the world. Russia and Ukraine combined contribute 25% to the total global wheat supply.

Some economic and political indicators show that President Putin has rather managed Russia well during the seven years of sanctions. He steered Moscow both economically and politically, in a more determined manner.
How the fresh round of sanctions will impact Russia is the present query of this write-up. It analyses only three indicators foreign exchange reserves, energy and military.

I.Foreign exchange reserves

Unlike Iran and North Korea Russia’s foreign exchange reserves ballooned from USD 400 Bn to USD 600 Bn during this period. Although private debt too has gone up, around USD 350-360Bn, huge forex reserves gives the government leverage to nullify its effect. Big economies ike India feel proud of this much of forex reserves.

II.Energy

The sanction has miserably failed to checkmate Russia’s importance in the international energy market. Rather, its status rose like a phoenix. Perhaps Russia has never been so influential both in the global energy market as well as in the OPEC cartel as it is now. Now, the cartel has become OPEC+ and this is Russia. Without taking OPCE + into confidence, OPEC members cannot turn the crude oil tap in their favor. Not even the survival of the US companies entering the energy market as net exporter, is possible with the Russian nod. This is because of Russia’s changed energy policy. Second, Russia is not Iran in either sense. Russia has huge oil and gas reserves and President Putin has focused on production according to the size of reserves and significantly increased Russian share equal to Saudi Arabia, contributing 23% to the global oil market and 9.2% to petroleum products. Russia succeeded in convincing the OPCE that their joint interests are only served when they have consensus of a common production policy. Otherwise, Moscow is free to keep the market volatile.
While Iran has never been so influential in the global oil market. Its share has been so small that it was easily substituted by Gulf countries every time when there was a call. Russia is beyond the compensating capacity as no group or country has so much spare capacity to pump 23% oil on demand. President Biden’s call to increase oil production to prevent price escalation has not been heeded with much enthusiasm. The reasons are both, no country has so much spare capacity and another, Covid-19 has squeezed them so much they need oil prices to be high. A $10/bbl rise in oil price accrues $65 Bn to the Gulf countries. The chart shows the reality of the oil market.

Last week’s Gas Producing Forum that took place in Qatar, President Putin assured the continuity of the gas supply. While nothing revolutionary happened in the OPEC+ meeting held on 2 March 2022. President Putin dialled the Crown Prince of Abu Dhabi, while Saudi Arabia, another oil baron, has reiterated its commitment to abide by the OPEC+ decision on oil production, which means Riyadh would not take unilateral decision to increase oil production.

Could Russia’s reduced energy profile be painless to the world?

It is clear that right now no country has so much spare capacity to meet 23% Russian share. Thus, any shortfall in oil supply will automatically lead prices up which is already ruling over 11-year high, $105/bbl. Any sustained rise in oil prices will rock the global economic recovery which has slowly started emerging out of the Covid-19 gloom after two years. Thus, it is not possible to compensate the Russians either in the short term or even in the medium term as the green crescendo has become so high and lucrative that most of the global investors are diverting their funds to green energy.

Looking at the debilitating impact of oil prices on the world economy, the Biden administration “leaves room to business to manoeuvre, especially in the critical energy sector” till the Russian oil and gas shares are arranged.

Russia’s energy profile makes Moscow, what experts call, a Strategic Petro-state, which cannot be taken away without a strong united action against Moscow.
Russia’s presence in Syria further strengthens its energy profile. No gas supply, including gas pipelines, can flow to Europe from Qatar or even Iran without Moscow’s nod. Before the crisis erupted President, Biden had invited the Emir of Qatar to White House to discuss perhaps gas supplies to Europe in case Moscow cut gas supplies which meet 40% of the total European gas consumption. The Emir of Qatar showed Qatar’S inability Sad it locked in long-term contract as well as lacks spare capacity to meet The Russian share. Thus, it shows that only the world was in the dark about the recent crisis likely to erupt.

III. Military

Russia’s military profile is no less powerful than energy. Its share in global arms export is next to the US. Although some countries have started importing from the US-West under diversifying their arms imports, the countries which were with Russia during the Soviet days, still need spare parts to maintain their defense equipment operational. For instance, the US, France, UK, Israel are now India’s largest arms exporters but its 60% defense depends upon Russian spare parts. Second, Russia’s exemplary handling in Syria has once again established the credibility of the Russian arms and equipment. S-400 is a living example that even Turkey, a NATO member, went ahead to purchase it despite being put under the Financial Action Task Force (FATF). In these years, Russia has also changed its arms sale policy. It has been signing joint defense manufacturing agreements with the recipient countries and making them capable to produce, especially the small arms. China, India, Saudi Arabia have been the top beneficiaries of Russia’s joint defense manufacturing policy.

Thus, Russia would continue to reign the global arms and energy markets even this round of sanctions and force countries to device parallel payment mechanism to the US-West dominated SWIFT system

IV.No More Geopolitical Retreat

The Crimean episode and now the full-fledged military action in Ukraine and nuke warning to the West European countries simply shows that Putin is determined to end Russia’s “geopolitical retreat”. In 1990 when the USSR disintegrated President Gorbachev signed the Treaty on the Final Settlement in which the US-West agreed, ‘no eastward expansion of NATO’ but in 2007 at Bucharest Summit Declaration the Bush administration encouraged Georgia and Ukraine to join NATO. Fresh news is coming that Russia has taken control of two Ukrainan nuclear stations. The Russian Juggernaut is not likely to stop until NATO convenes an emergency meeting and declares to abide by the Treaty on the Final Settlement.

Does Russia siting on its Sanction fate?

Since the last sanctions, Russia has been experimenting a number of measures to ward off the sanctions. First Russia is internationalizing the use of SFMS (Structural Financial Messaging Instituting) which it was using for domestic purposes. Focusing on trade in local currency; currency swap are other means to continue trade and payment. China is also planning to use the CIPS system. A parliamentary committee has suggested India to revive SFMS or devise a new method of payment. The Indian government is consulting banks and financial institutions to start Rupee-Rubel, popular during the Soviet days. As more countries come under sanctions, it will be easier for Moscow to build up a parallel messaging network to SWIFT.

The acceptance of Digital currency by several countries and conducting digital trade is another way out. In the recent Free Trade Agreement, India and UAE have agreed to conduct digital trade.
India has never stopped its both merchandise and arms trade with Russia since 2014. But the disturbances in Black Sea this time has forced the shipping insurance companies to withdraw their coverage and the Indian traders have proposed to use the Chinese route. Here we find a glimpse of converging interest of the business communities of two countries, India and China.

What about countries abstaining from the UN -How they would respond to the new sanction?

Why three countries, China, India and the UAE abstained from the UN meetings, including the emergency meeting and how would they behave once Russia comes under full sanctions, will be another interesting story to listen.
India

India seems caught between “Military and Market’; “Gun and Bread”. “Gun and Roses”. Militarily and strategically Russia is indispensable to India’s stability and growth. Although in recent years India has diversified its military arsenals, making the US, Israel, France and the UK its largest arms suppliers, still 60-65% of its defense platforms need Russian spare parts to keep it operational. Strategically too, Moscow has an old history of coming to New Delhi’s rescues both posing deterrence to the enemies in war-fields and backing India in the UN. While two recent events, Chinese aggression and excluding India from AUKUS has convinced New Delhi about its importance both in the Indo-Pacific and the western security paradigm which seems not going beyond exporting arms and using New Delhi against Beijing.
However, market-wise (economy-wise), India cannot ignore the US, Europe and allies. They are India’s largest trade destinations. India’s target of achieving $ 2 Trillion exports by 2027, would never materialise once these destinations put conditions.

Unlike other countries, why does India have to walk on a tightrope to balance its military and economic interests and maintain its strategic autonomy? India’s strategic autonomy is nothing but a sane voice in the world which is the need of the hour. So, we expect countries to either follow or support India.

UAE

Last week UAE abstained from two of the three UN resolutions passed against Russia. The Western media said this is enough to show the UAE’s sympathy to Moscow. Both, stakes and security importance of Russia in the Gulf have significantly increased since its footprint has grown in the region. Trade, investment, tourism, food security and security, especially against the non-state/asymmetric forces (Houthis) makes the UAE’s engagements with Russia special and deeper than other Arab Gulf states.

Dubai hosts the largest number of Russian tourists every year. In 2021, around 6% (600,000) Russian tourists visited Dubai. With tourism, UAE’s aviation and hospitality sectors get businesses.
Russia and Ukraine play an important role in UAE’s food security. Combined share of Russia and Ukraine wheat increased from one third ($19 Million) to half ($154 million). Besides, the UAE has made a good amount of investment in Russia.

Since the Gulf crisis started, Russia’s importance in regional security has profoundly increased. Now, Russia is more feared and acknowledged. Survival of President Assad and close relations with Tehran gives Moscow big leverage not only over the formal security apparatus but also brings some nonstate actors under its control, including Houthis, the nightmare of Gulf monarchs.
The shafting focus of the US to Indo-Pacific has further increased the Russian influence in the region.

China

Why China abstained from all the three UN meetings held this week and what Beijing aims to achieve in the ‘post-Ukraine and ‘post-sanctioned’ Russia is an open secret. However, conspiracy theory always opens new doors of visualization. Here too some experts feel that China is the real Chameleon, waiting for the opportunity to change its colour. Could president Xi Jingpin undertake Putin-style military action against Taiwan or any other country? Only time will tell, but right now, China is an economic superpower that never wants to close its biggest US-West trade and investment markets. China’s main concern is India. Let us see how Moscow, Beijing and New Delhi behave once Russia ends its operation and comes under sanctions’ scanner?

Turkey – from Shining boy to dancing boy of Bosporus

Turkey’s recent decision to envoke the Montreux Convention, closing the two Straits, Bosporus and Dardanelles, against the Russian warships crossing the Black Sea to enter the Mediterranean Sea momentarily shows that Ankara is with the Washington. But what would Turkey would get in return? Its long-awaited EU membership? What will Ankara lose once it annoys Putin? Would NATO come to its rescue? Obviously, President Putin would not allow Ankara to strengthen its ethnic solidarity in Central Asia and in Russian domain, including Libya. Thus, ending Turkey’s active diplomacy in these regions. Hope that Ankara’s announcement of enforcing the Montreux Convention remains symbolic.

As The Economist writes, “Reluctant to use hard power, America and Europe have reached for economic penalties instead. Some 10,000 people or forms are subject to American sanctions, affecting over 50 countries with 27% of world GDP, and covering everything from torture to cryptocurrencies’ gives idea how long, at what cost and how many countries would follow the sanction. Looking at this scenario, it appears true that the US-West would also be in hurry to end the sanctions as Russia too wants to settle and leave Ukraine. Otherwise what the winners of the Nobel Peace Prize 2017 said will become a reality. “Mankind’s destruction caused by a nuclear war is just one “impulsive tantrum away”.

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Author is Delhi-based political Economist. Views are his own.

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