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US' Russia Sanctions Are Superb at Generating Headlines...and Totally Useless at Bending Moscow to America's Will

"Wealthy oligarchs like Deripaska are easy fare. Making an example of the aluminium tycoon will produce major headlines and make the US look pro-active. But it will not impact Kremlin foreign policy."

  • The US Treasury has successfully hammered a Yeltsin-era oligarch and sent the aluminium markets into uncertainty and disarray but that is something completely different from bending Putin to its will

Just days before the 2018 FIFA World Cup kicked off in Russia the United States imposed a new set of sanctions on the host country. Five Russian companies and three citizens were targeted. They were accused of aiding Russia's security services in carrying out cyberattacks against the US. “The United States is engaged in an ongoing effort to counter malicious actors working at the behest of the Russian Federation and its military and intelligence units to increase Russia's offensive cyber capabilities”, Treasury Secretary Steve Mnuchin said.

These new sanctions come as the fallout continues from the April 6 round of sanctions. Then, seven Russian oligarchs, their businesses, and 17 government officials were targeted because they, according to the US Treasury, profit from Moscow's kleptocracy and advance its “malign activity”.

The biggest name was Oleg Deripaska. He and his companies – including En+ and Rusal – were hit hard. So hard, in fact, that within two weeks the US Treasury announced that the sanctions against Rusal would be lifted if Deripaska ceded control.

There has since been a scramble to put distance between the two. Deripaska has resigned from the board. At the end of May, Rusal's chief executive and seven other board members, seen as close to Deripaska, quit. At the start of June, En+ (which controls 48% of Rusal) hired investment bank Rothschild to sell part of Deripaska's stake, while a New York based recruitment agency began looking for new directors. Ties are being severed where possible.

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The sanctions, then, are clearly having an impact. Deripaska has become a financial pariah. The future of Rusal – which without sanction relief will struggle to pay its dollar-denominated debt – remains unclear. Taken together with January's imperfect “Countering America’s Adversaries Through Sanctions Act” (better known, thankfully, as CAATSA), Russia's growth outlook has taken a dent. Morgan Stanley recently raised the risk of recession should sanctions become tighter. A high oil price would not save the economy, it said. Moscow's relationships with defence partners are under threat, including lucrative deals with India. While the Kremlin has managed to mitigate some of the worst effects of sanctions since 2014, the long-term picture is far from rosy.

Policy-making on the hoof

Yet the sanctions have clearly fallen short in properly countering Russia's behaviour and deserve further scrutiny. Whether one celebrates the downfall of someone like Deripaska or not, in sanctioning his companies, particularly Rusal, the US targeted a global metal industry player without taking into account the impact on international markets.

Washington has also misjudged the importance of someone like Deripaska to the Kremlin. Indeed, few of the necessary boxes in designing an effective sanction policy have been ticked. All of this raises serious questions about the decision making within the US Treasury, and the broader administration's strategy vis-a-vis Russia.

First, in targeting Deripaska like it did the US showed it was willing to shut him and his businesses out of the dollar financial system. This is significant not just because Rusal is a key strategic asset for Moscow, but also because it is the world's second largest aluminium producer, operating globally. The consequences of the sanctions were immediate. Stocks fell and aluminium prices soared due to worry over availability. Other raw materials in the supply chain were hit. Alumina, a key material in the production of aluminium, saw its price jump. The future of a Rusal owned plant in Ireland, Europe's largest supplier of alumina, remains uncertain. Mines, smelter and refineries, from Australia to Guyana have been affected, putting jobs at risk.

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It wasn't a surprise when the US retreated after two weeks of market chaos. At the end of April Washington announced that companies already dealing with Rusal would be given until October to wind up their business. Treasury Secretary Mnuchin stressed that the US was “not targeting the hardworking people who depend on Rusal and its subsidiaries”. But the damage had already been done.

The sanction amendments were revealing. They showed the US administration had not anticipated the impact on global markets or supply chains. They showed the economic power of the US to essentially shape the ownership of a major Russian company. But they also showed the US to have glib attitude towards the potential repercussions. To understand this recklessness one does not need to sympathise with the likes of Deripaska.

Indeed, the way in which the US has targeted Deripaska and his companies is emblematic of a wider problem in the Treasury's attitude. Wealthy oligarchs like Deripaska are easy fare. Making an example of the aluminium tycoon will produce major headlines and make the US look pro-active. But it will not impact Kremlin foreign policy. The US Treasury has overestimated Deripaska’s importance, as he simply doesn't have much political influence. It is true that Deripaska has benefitted from President Putin's rule, but this has, in the main, been by way of fronting a multi-national company deemed an important strategic and economic asset to Moscow. The health of a business like Rusal – a source of work in towns across Russia, employing thousands – will be prioritised over Deripaska's position and wallet.

Washington should know this. Deripaska is a Yeltsin-era oligarch. That was a time when money and politics collided amongst the oligarchic class. When Putin came to power, he sought to curb that political influence, reducing their stake in political decision making. Deripaska has maintained a good relationship with the Kremlin – which is all but essential if you are to remain a member of the business elite in Russia – but he has stayed out of politics. He has never been a 'Putin crony'. That title should be reserved for certain individuals within the presidential administration, security services, as well as Putin-era 'oligarchs' such as Igor Sechin and Sergei Chemezov.

Where art thou strategy?

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Much of this comes down to what you’d expect economic sanctions to do. In the policy-making world sanctions are intended not as indiscriminate punishment but as a coercive tool to put economic pressure on an adversary in an effort to change behaviour. The reality has not always lived up to the theory. Sanctions have a mixed history of success. They have often proven to been ineffective, despite their increased use since the 1990s. Still, where they have achieved political results they have been narrowly defined, with achievable aims and a clear relationship between the sanctions imposed and what needs to be done for them to be lifted. It is about carrots and sticks.

Sanctions have also shown themselves to be a powerful form of communication, particularly when rolled out by a broad coalition of countries. They can display unity, authority, and re-affirm values. The Iran sanctions, which helped create a constructive environment for the Joint Comprehensive Plan of Action (JCPOA) – an agreement President Trump recently abandoned – are a good example of this.

Yet much of the above remains absent from April's sanctions. First, they were rolled out in response to what can only be described as a shopping list of Russian bad behaviour, from the annexation of Crimea to money laundering through to cyber attacks. These must be countered – but tacking them to the same sanctions sets unrealistic expectations, confuses broader policy goals, and leaves little room for incentives and dialogue. Their broadness may even help President Putin cynically reinforce his 'fortress Russia' narrative.

Unity amongst US allies is also lacking. Many European countries and companies were quick to push back against the sanctions targeting Rusal due to worries about the impact on their own manufacturing and supply chains. Given the already escalating tensions over trade tariffs, the transatlantic relationship could well deteriorate further. There have been domestic tensions, too. US ambassador to the UN, Nikki Haley, was scolded in April by the White House for suggesting Syria-related sanctions on Russia. In May, Defence Secretary James Mattis asked Congress for a way around January's CAATSA law in an effort to avoid damaging relations with strategic partners like India. It is difficult to display convincing authority or direction with such divisions.

The potential role for economic sanctions should not be diminished by these criticisms. Sanctions can, and should, be a valuable part of a broad, imaginative, multi-layered approach toward Moscow. The gap between mere talk and military force is wide, yet has few tangible resources to take advantage of. Sanctions are certainly one. But their recent use by the US against Moscow suggests an administration that is not entirely clear about what it wants to achieve with them – let alone how it would measure their success. Sanctions are not a shortcut, or a way to bypass tough policy decisions. They are a tactic, not a strategy. The US is in desperate need of the latter.

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