No pain, no gain.
That might cut it for meaningful workouts, but not necessarily for meaningful sanctions. After all, your trainer might demand you break a sweat, but countries that impose sanctions on other countries can’t demand so much that they break…themselves.
It’s true, and isn’t Russia delighting in the folly of it all. The United States and Europe are putting together what they hope will be deep and far-ranging sanctions against Vladimir Putin & Company. More limited sanctions, largely confined to banking and investing activities, apparently did little to rein in Russia’s strong-arming in Ukraine.
But that could be changing. Ever since the downing of Malaysian Airlines MH17, President Obama has had what one foreign policy wonk called the “sanctions wind at his back,” enabling far tougher measures against Putin – or at least calls for far tougher measures. Even countries that were little disposed to punishing a nation with whom they did a great deal of business, and from whom they depended on a great deal of energy, changed mightily post-Malaysia Air.
Here’s the thing though – they’re angrier, but still not angry enough to shoot themselves in the economic foot. Even the Netherlands, which accounted for 200 of the 298 victims in that Malaysia plane crash, aren’t too keen on going too far.
Things could change, and measures could toughen. But given the fact that Europeans have 20 times the economic exposure to Russia that Americans do, there’s only so much European countries will do to spite their economic face. That’s doubly true when some of the continent’s biggest companies warn of serious financial hits if more stringent sanctions against Russia take hold.
BP chose an otherwise uplifting second quarter earnings report to warn all that could be reversed if tougher sanctions go into effect, saying they “could adversely impact our business.”
Right now, BP has a 20% stake in Russian energy giant Rosneft, and fears things getting frosty and fast. “Any future erosion of our relationship with Rosneft,” BP said, “could adversely impact our business and strategic objectives in Russia, the level of our income, production and reserves, our investment in Rosneft and our reputation.”
Such corporate fears are building here in the U.S. as well. Even though Russian markets account for less than 1% of U.S. exports, those goods are disproportionately high-tech. Slap them down, and some technology chief executives here fear the fallout could be noticeable for their industry. That’s why they’ve urged the president to go slowly.
Major U.S. banks are urging the same. They fear that new sanctions on key parts of the Russian banking and energy industries leave them vulnerable too. The president’s so-called “Sectoral Sanctions Identifications List," or SSI List, bars U.S. firms from signing any new debt longer than 90 days maturity. Washington’s intent, of course, is to strangle Russia by closing off its access to money. But those American firms providing that dough worry they might already be breaking the law now, if they don’t renegotiate contracts signed years ago.
They’re in a legal limbo that could explain why Russia was actually increasing its business with these firms recently. Putin reportedly urged Russian companies to front-load orders ahead of sanctions he accurately predicted would tighten, but not to the point the West would be tipped off.
That could explain the oddity of U.S. exports to Russia actually increasing over these last few months. Specifically, the U.S. Census Bureau foreign trade data show exports rising 17% from March through May (more recent numbers aren’t available), compared to the previous three months, before sanctions were imposed.
U.S. banks fear sanctions risk leaving them exposed to not only a country that cannot pay, but will not pay. Their overall exposure to Russia might be limited, but as we’ve learned from the great financial meltdown, that doesn’t mean the reverberations always will be.
Trade wars, sanction wars, economic wars – whatever you want to call them, they have a habit of getting out of control. As one trade expert put it, the tit-for-tat tends to get increasingly nasty. And let’s just say Putin is very good at nasty, and reading nervous leaders’ minds too. He knows instinctively that their countries get every bit as burned as his, if they go too far punishing Moscow.
Putin also knows that savvy financial traders around the globe can see Russia’s battered ruble and stock market have rebounded from their immediate post-Crimea tumble. Oddly, if not ironically, Russian stocks have held up surprisingly well throughout the Malaysian Air fallout and the renewed Russian offensive in Ukraine. Whether any of these are signs Russia is bullet-proof is anyone’s guess, but trade watchers say it’s another reason for Putin to sit tight, and the guys imposing the sanctions to sit nervously.
Even a worst case scenario – that tougher sanctions bring economic hardship to Russia and maybe a recession – doesn’t mean the countries bringing on that recession don’t feel the pinch as well. Banks suffer. Energy companies suffer. Technology companies suffer. Not all, but enough to rattle their sectors, their stocks, and their home markets as well. Putin is banking on other nations blinking first. History suggests, he’s right to wait them out, because invariably they do.
The question then for the world is whether it’s worth the hurt, hurting Moscow. Human rights groups say it is, and the White House clearly thinks even limited pain here is worth the significant pain it will inflict there. The history of sanctions shows the ones that work are the ones that really hurt. But will the world’s disgust with a cavalier Putin go so far as to put their own economies in some jeopardy? That’s the multi-billion-dollar question – not whether it’s worth sticking it to Russia, but it’s also worth sticking it to themselves to make the point.
As they say..stay tuned.
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