August 1, 2014

TSG IntelBrief: Russian Intentions and Capabilities Amid Sanctions

• This week’s additional EU/US sanctions against Russia are the most serious yet, but their impact is far from certain

• The sanctions are unlikely to generate the popular unrest that would move Russian President Putin from his current course: he likely fears losing popular support by backing down in Ukraine more than the disapproval of his business associates and cronies over sanctions that remain targeted in scope

• At least in the short term, Russia is positioned to weather the current sanctions, with a favorable trade surplus, low unemployment, sizable currency reserves, and low sovereign debt

• The question for the EU and US is what happens next if Russia continues its operations in Ukraine, or even expands them as the Ukrainian military makes gains.

This week’s imposition of broader economic sanctions against Russia by the EU and the US elevates tensions between all parties to a level not seen in decades, but it is hardly the advent of a new cold war—though relations are certainly growing colder.

The new sanctions, while serious, are still understandably targeted—mostly at prominent Russian financial institutions and personalities. The thinking behind the sanctions is that they will push Putin’s inner circle—the rich cronies with hands on the largest levers of economic power—to pressure Putin into moderating his increasingly assertive foreign policy. The sanctions will indeed cause his associates some pain, and they will likely express displeasure to Putin. But given how much Putin’s rise in popular support is directly tied to his assertiveness in Ukraine, he might respond differently than anticipated.

The majority of Russian media, with some notable exceptions, have parroted the Kremlin’s line that events in the Ukraine, to include the downing of MH17, are a Western plot against the Russian people—first the ethnic Russians in Ukraine, and then Russia itself. This non-stop messaging has whipped public support for Putin to new heights, though it is hard to truly assess the depth of the support. Regardless, the current sanctions are unlikely to impose significant hardship on the Russian people as a whole, nor are they designed to. So it is unlikely there will be sufficient popular pressure to move Putin from his current course. Having built himself up as the “Restorer of Greater Russia” and the protector of Russians everywhere, he might be quite reluctant to be seen as backing down, regardless of the financial pain, at least in the near-term.

When it comes to withstanding sanctions, Russia is in relatively good shape, with oil prices hovering around $100 per barrel and Russian natural gas prices sliding slowly, but still at $10.5 per million BTU. Russia has the fifth largest foreign currency reserves (approximately $478 billion) and a low debt to GDP ratio of 13%. With its oil and gas sales not only unlikely to decrease in the near-term but increase as summer turns to autumn in Europe, Russia will probably withstand sanctions better than Ukraine might withstand the economic impact of continued tensions with Russia and hostilities in eastern Ukraine.

What’s next for the EU and US if Putin shrugs off the sanctions in the near term? Perhaps it is important to define what is the near term when discussing the impact of these sanctions. How quickly do Western governments anticipate a change in Russian behavior? Much of the answer will depend on what happens on the ground in Ukraine. The downing of MH17 generated the public pressure to impose new sanctions but it hasn’t materially impacted the fighting on the ground, where rebels still possess and make use of surface-to-air missiles against Ukrainian aircraft. Reports from the US that Russia is firing artillery from Russia into Ukraine, even after MH17, suggest that foreign condemnation matters far less to Putin that domestic adoration. It is hard to overstate the importance Putin has placed on keeping Ukraine in Russia’s sphere of influence, and anything less than EU/US ironclad solidarity and sanctions is unlikely to change that.

Russia appears to have ramped up its support for the rebels after the Ukrainian military made advances in the east. After a few weeks of stalemate, Ukraine is again poised to make big advances against the rebel forces around Donetsk and the surrounding areas. If Russia continues or even increases its support over the next several weeks, this suggests Putin intends to shrug off the sanctions for now, which could lead to more intense fighting in Ukraine and more complications for—and further action from—the EU and US.


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