Sanctions Won’t Change Putin, But May Change His Elites’ Support

May 28, 2014
Putin behind Igor Sechin (R), the CEO of Rosneft, and Marco Tronchetti Provera of Italian tire manufacturer Pirelli. Photo by CNN

The evidence that sanctions change a state’s policies is slim. Actually it’s very slim. Economic sanctions taken by themselves have rarely produced the outcomes with which they were designed to produce. The main reason is that the global economy is so diverse, so spread out, that it is almost impossible to create an overarching and effective sanctions regime that is mostly adhered to by the world’s political actors. Even in the case of Iran, the most recently cited example of economic sanctions bringing about desired outcomes—at least initially by getting Iran to the negotiating table—is not universally agreed upon by experts that sanctions were the cause. That’s why when seemingly the only response to Putin invading Crimea and instigating anarchy in Ukraine (along with threatening to invade by massing troops on the border) was sanctions; it was seen as a weak and hollow response.

And to some degree they are. Sanctions, no matter how coordinated between the EU and the U.S., will not dissuade Putin or change his calculus, especially as he is increasingly operating with a more idealistic worldview, guided by an moralistic and messianic mission. That is why no amount of opprobrium or threatening of sanctions will stop Putin in Ukraine—or in any region that is deemed to be Russia’s sphere of influence. But they never should have been viewed in isolation. They are merely one part of a multi-faceted approach to increase the costs of actions, and to alter the future calculus of similar thinking. The use of targeted sanctions to increase the costs—both immediately and cumulatively—are meant to be utilized in coordination with diplomatic and political support; in this case to the interim government in Kiev. The key is that sanctions have to be targeted and specifically crafted to increase maximum impact instead of industry wide sanctions which will fail in their purpose and only serve to increase Putin’s support (the latest calls by several senators to cancel a deal with Russian arms exporter Rosoboronexport to provide helicopters to the nascent Afghan air force is just one example of the farcical calls for widespread sanctions that will serve to only hurt the Afghans and the ability of the U.S. to leave a sustainable Afghan government.)

The financial outflow (which stands at $63.7 billion in the first quarter, more than all of 2014) and the wider impact on the Russian economy (inflation stands at 7.6% with no growth the most optimistic outcome) caused by sanctions and continued unrest are seemingly of little consequence to Putin, who feels that time, and a burgeoning economic interdependence with China, will allow Russia to survive any economic hardship. But apparently these factors were enough to make Putin realize that the invasion and occupation of Eastern Ukraine was a price that even he was unwilling to pay (at least for now).

While it seems that Putin is willing to tolerate sanctions, Russia’s elite may not be so committed. The Russian elite is very much an international elite which relies on access to the international financial system to not only conduct business but to also provide for the luxuries available to a newly enriched Russian society. They are the very same people who have supported Putin throughout his presidency and even supported his increasing authoritarianism because he continued to provide stability and rising standards of living for much of the country. This allowed segments of the population the ability to vacation in France and Spain or to send ones children to school in the West. Yet these luxuries come under threat with increased scrutiny, hesitance of western financial institutions to do business with Russia, and ongoing uncertainty. Sanctions promote that uncertainty.

The billionaire oligarchs, who have learned to play the game in Russia by conducting their business while either remaining politically quiet or by becoming political insiders like Igor Sechin (Head of Rosneft) and Gennady Timchenko (Former head of Gunvor, an oil trading firm based out of Switzerland), were both subject to U.S. sanctions. And it’s not just the mega-oligarchs who are nervous, but also the lower level businessmen, politicians and security officials who profit from their status and position—most often through corruption and the careful balancing act between the grey and black markets.

Since Putin came to power he was content to let the elite spirit much of their holdings to the West where it was safe from the capricious and unstable jungle that is the Russian economy. Locales in the west provide not only a safe and welcoming banking environment but stable and dependable legal protections as well. That is why the elite need places like London, Latvia, Cyprus, Netherlands and even New York to introduce their wealth into the anonymity and safety of the global financial system.

Yet as challenges to his rule started being fought in public, both through public protests and intra-elite competition, Putin increasingly realized that he needed to be in a position where he could threaten the elites’ financial holdings as a form of assurance. That is why he launched a de-offshorization program which sought to repatriate Russian assets abroad. Yet, the program was clearly designed to be applied selectively against those whose loyalty was of question (the author of the bill, Vladimir Pekhtin, the chairman of the Duma ethics committee was found to own condos in Miami worth $2 million). However, the program has not led to any increase in loyalty among the elite, in fact it has become increasingly clear that Putin is relying on an increasingly small group of officials and advisors.

This is precisely where sanctions and isolation will undermine Putin’s support. As Russia becomes more removed from the international financial system and people find their companies, investments and bank accounts under scrutiny from compliance officers (whether under sanctions or not as any investment from Russia is increasingly treated with apprehension) Putin’s support from this crucial societal block is starting to wane. The sanctions will continue to increase the costs of supporting Putin’s regime and actions and will alter the cost/benefit calculus of the elite, whose support until this point has rested on Putin’s ability to provide material and financial benefits. Sanctions can’t take Putin down or even realistically change his actions, but they can increase discontent among the elite and force Putin to expend more political capital and security muscle to control dissent. The design of sanctions shouldn’t be to stop Putin, only to create fissures in the regime which, if big enough, will allow the discontent of the elite to fully crack.