The Russia sanctions cul-de-sac

By Dan Steinbock
0 Comment(s)Print E-mail China.org.cn, September 1, 2014
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[By Jiao Haiyang/China.org.cn]

 [By Jiao Haiyang/China.org.cn]



Economic spillover threats

America accounts for a relatively small share of Russia’s trade and investment. Last year, Russia imported less than 6 percent of its goods from the U.S. and exported less than 3 percent of its goods to the U.S. Less than 1 percent of foreign investment in Russia is from the U.S.

Yet, the sanctions are likely to be more harmful at the firm- and sectoral level. Many large U.S. corporations export to Russia, have joint ventures, or rely on Russian suppliers. These include ExxonMobil’s cooperation with Rosneft in the Russian Arctic; Pepsi’s operations; Ford’s partnership with Sollers; GE’s joint ventures; Boeing’s exports and so on.

Sanctions also have significant indirect economic effects on Russia, including undermining investor confidence (e.g., capital flight).

But it is the ailing Europe that has the most to lose in the sanctions debacle. In the financial sector, European banks had 75 percent of Russia’s foreign bank loans in late 2013. Russia supplies Europe with a third of its oil imports and over two-fifths of its natural gas imports.

If the West takes the current sanctions to still another level, it will try to broaden the US/EU sanction coalition, toughen existing sanctions and deepen sectoral sanctions, particularly in energy and banking. In Russia, that would test Putin’s popularity and turn a mild contraction into a more serious recession. In Europe, it could push the region into a triple-dip recession. In the U.S., it would threaten the fragile recovery directly through sectoral pain and indirectly through European stagnation.

In the nascent multipolar world, Cold War era sanctions no longer achieve their objectives, but are likely to have an adverse impact on all affected economies and could drastically diminish global economic prospects.

Sanctions must be replaced by a diplomatic solution – the sooner, the better.

Dr Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and EU Center (Singapore). For more, see http://www.differencegroup.net/

This article was first published at Chinausfocus.com To see the original version please visit http://www.chinausfocus.com/finance-economy/the-russia-sanctions-cul-de-sac/

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