US sanctions against Russia less damaging that had been expected

The sanctions announced last week were milder than had been expected, with the exception of the ban on US investors buying Russian state issued ruble debt after June 15, Chris Weafer, co-founder of Macro Advisory in Moscow, told New Europe in an interview on April 19.

The Administration of US President Joe Biden announced on April 15 new sanctions against Moscow over its SolarWinds espionage campaign and election interference efforts, illegal annexation and occupation of Ukraine’s Crimea, and human rights abuses.

Expectations had built that the US was coming with a much harsher and broader list of sanctions. US Secretary of State Antony Blinken had more or less said that the Administration was considering a list of tough sanctions actions in early March. “But what was delivered last week was much less damaging,” Weafer said, adding that there were no high-profile people added to the SDN (special designated people) list and no mention of the controversial Nord Stream 2 that will carry Russian gas to Germany across the bottom of the Baltic Sea bypassing transit countries, including Ukraine.

Weafer noted that none of the sanctions will have an impact on the Russian economy or will change the government’s strategies for trying to revive and expand the economy. “The sting in the tail may be the ban on US investors buying Russian state ruble debt. For now, that is inconsequential as the country has a strong financial position – fifth highest financial reserves and sixth lowest national debt in the world – and the budget is back in surplus,” Weafer said, adding that the federal budget assumes Brent oil at just above $46 per barrel while the current price is comfortably averaging above $60. “But that situation could change in the future if, for example, there was another oil price collapse. It means that the government may adopt a more conservative fiscal approach and prefer to keep both financial savings high and debt low so as to reduce the risk of needing to access debt markets in the future,” he explained.

What’s next?

“This is hardly the end of the matter and it is far too soon to say we can draw a line under sanctions,” Weafer said, adding that the US statement made clear that it has other sanctions actions in reserve and may apply some depending on Russian actions.

The statement issued last week made no mention of the CBW (Chemical Weapons) sanctions that the European Union has applied and which the US should also apply. This relates to the attack against Kremlin critic Alexei Navalny last year. “So, this set of sanctions may still come in the coming weeks,” Weafer said.

Why the softer approach?

Weafer argued that the Biden Administration has had a change of mind about Russia. “In the early days of the Administration several senior officials, including the Secretary and State, the National Security Adviser and the head of the CIA, all said that Russia was not a priority and they did not expect to have to engage much with Moscow. They all said that the two key priorities would be A) containing China and B) reengaging with Europe,” he said.

The change of heart, at least to hit Russia with mild sanctions for now and keep tougher actions in reserves, may be because Biden wants to keep Russia engaged in efforts to tackle climate change, Weafer said, adding that given Russia’s geography and location, it would be difficulty to effectively deal with the problem without Russia.

Another reason for the mild sanction may be because many in Washington have warned that sanctions against Russia was pushing the country too close to China and in a way that posed a threat to the US. “Russia has a lot of military and technology expertise that China would benefit from while allowing China greater access to Russian energy resources helps to improve the security of the Chinese economy,” Weafer said.

Moreover, according to the Macro Advisory expert, after the US withdraws its forces from Afghanistan, announced for later this year, security cooperation with Russia will be more important, especially in Central Asia.

It should also be noted that Russia and the United States have recently extended their space cooperation until 2030, Weafer said.

Russia is now the 2nd largest exporter of oil to the United States as refineries along the Gulf Coast need Russia oil to replace the Venezuelan oil that they cannot buy due to sanctions.

Moscow’s response

According to Weafer, the expulsion of diplomats is an automatic response and entirely predictable. “The ‘invitation for the US Ambassador to return home for consultations’ is unusual but a long way short of an expulsion. He may return after a suitable period away,” he said.

Moscow is not expected to take any further actions against the US or US companies working in Russia. “The Kremlin has been very consistent in its stance that ‘bad politics should not be allowed to contaminate good business’. That is not, nor will not change as a result of last week’s sanctions,” he said.

What could change?

There are a number of issues that could create a catalyst for additional sanctions. “What happens to Alexey Navalny and what happens on the Ukraine border are the two obvious issues to watch over the near term,” Weafer said. “If Alexei Navalny were to die or there was an incursion of Russian forces into Ukraine (for whatever reason) then the US would almost certainly bring more sanctions and, probably, closer to those threatened in early March than seen last week,” he added.

On a more positive note, if Navalny’s health stabilises and the situation on the Ukraine border stays unchanged, then the summit between Biden and Russian President Vladimir Putin would almost certainly take place, Weafer said, noting that it would be different to the last summit, between Putin and Donald J. Trump, but at least it would mark an improvement to pragmatic engagement and allow hope that the deterioration of the last 7 years has ended. “We are, of course, a long way from talking about any sort of improvement, but after the last seven years of dangerous skirmishing, most people will take pragmatism as the preferred backdrop for the next couple of years,” Weafer said, adding, “It would also mean NordStream 2 gas flowing by the end of this year”.