Are More Sanctions Against Russia in Store?

March 5, 2015Global Challengesby Marc Chandler

Could Russia's next move result in additional sanctions?

The third cease fire in Ukraine had a rocky start, but today the German foreign minister noted that tensions have calmed.  The top NATO military commander, US Air Force General Breedlove agreed earlier today that there has been a "definite decrease" in fighting.  Both sides have withdrawn some weapons.  He noted that the past two cease fires were used to rearm and prepare for additional action.

Other reports indicate that the separatists continue to probe government forces.  There are concerns that the recent lull will prove temporary.  The weather alone would warrant some cessation of activity.  

Russia's pursuit of what is sometimes called a hybrid war has seen some success. It continues to occupy areas in Georgia and supports a separatist region in Moldova.  It has annexed Crimea and has armed insurgents in east Ukraine and augmented them with irregular troops.  Russia is successfully dismembering Ukraine's territorial integrity.

Some want Europe and the US to have a stronger military response to Russia's actions, deriding sanctions.  Yet in many ways the US and European response has been considerably stronger than when Russia began occupying parts of Georgia in 2008.  Moreover, a couple of years later, both Germany and France saw it appropriate to sell Russia military hardware, that were subsequently not delivered following the annexation of Crimea and only after intense pressure. 

The fact of the matter is that the US and NATO have been extremely reluctant to challenge Russia in what Moscow calls its near-abroad".  When the Soviet Union invaded Hungary in 1956 and Czechoslovakia in 1968, the US and NATO did not arm the citizens to help them repel the Soviets.  No one thought General Eisenhower or Johnson were pusillanimous. 

Assuming a rational actor, and given the success of the Putin's tactics, it seems reasonable to try to anticipate what he does next.  For global investors whose portfolios could be impacted, activity around two cities can be monitored.  

The first one is in Ukraine itself.  It is the city of Mariupol.  Its importance is strategic for Russia.  It is a land corridor that would connect the territory in east Ukraine the insurgents control with Crimea, which Russian annexed. The French foreign minister has warned Russia against taking the city, but the Putin seems to have little reason not probe further.  The Director of US National Intelligence warns that pro-Russian separatists will make a move on the city later this spring. 

The second city to watch is in Estonia; Narva.  Estonia had national elections this past weekend and the existing pro-EU and pro-NATO government beat back a challenge by a party with ties to Putin's United Russia political party.  Just as the US and NATO have not militarily confronted Russia over its activity on its borders, Russia has not tried its tactics on a NATO member.  Estonia is a NATO member. 

The key question is whether Putin is prepared to test his hybrid tactics on a NATO member.  If so, Narva is a potential candidate.  Reports suggest around 90% of the citizens speak native Russian and around half the people do not have Estonia passports.  Putin's tactics avoid overt action at first.  It is about propaganda and stirring local discontent.  This is used, it seems, to facilitate and recruit local insurgents. 

Europe and the US would likely respond to either of these scenarios with more sanctions.  One of the key ones, leaving aside those aimed at individuals and companies, would be to pass legislation that forces SWIFT to cut them out like it has the Iranians.  Some claim that such a move would simply encourage Russia to develop a parallel clearing system.  However, the critical networking effect may be stymied by the other sanctions, even if China, for example, or a few other countries, join. 

The point of this exercise is to think about what Russia does next.  It assumes that Russia is not about to change its underlying strategy, and that its efforts to rebuild a sphere of influence is not over.  These efforts will bring it into more confrontation with Europe and the United States.  It has to be assumed that this is a long-term development.  For investors with exposures to Eastern and Central Europe, it is worth considering Putin's next possible moves.

What is Putin's Next Move? is republished with permission from Marc to Market

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