After the MH17 plane crash, the West once again has to wrestle with the question of what to do with the defiant regime in the Kremlin. Diplomacy is not at the moment effective, but military options are unthinkable. Only economic sanctions will send a strong signal both to Moscow and to the outraged Western electorate. It is no wonder that the last meeting of European foreign ministers went further than asset freezes and travel bans for Vladimir Putin’s “cronies”. The ministers also considered “sectoral sanctions” that would target individual segments of Russia’s economy. They left open the option of placing an embargo on exports of “dual use goods and sensitive technologies, including in the energy sector”.
However, economic sanctions are always controversial – and they are often not as effective as promised. The last time the West applied economic sanctions against the Kremlin was before the fall of the Berlin Wall. The Soviet Union no longer exists, and Vladimir Putin is obviously no Leonid Brezhnev. However, the Cold War experience may shed some light on contemporary dilemmas.
Lesson 1: Sanctions hurt both sides
During the Cold War, sanctions were a specialty of the United States, and Europeans only reluctantly followed the American lead. The more that countries traded with the Soviet Union, the more they were unhappy to adopt sanctions. The reason was simple: trade creates interdependence, so sanctions hurt not only the Soviet Union but also its trading partners. West Germany was the Soviet Union’s biggest trading partner, but French firms such as Dresser-France, Alsthom-Atlantique, Thompson-CSF, Creusot-Loire, and Vallourec also did lucrative business with Soviet firms. Imposing sanctions without the participation of Moscow’s closest trading partners made little sense. Thus, the US had to work hard to convince West Germany, France, Holland, Italy, and Austria to accept the security rationale behind sanctions in spite of the economic costs involved.
Any talk about sanctions without the consent of Chancellor Angela Merkel is meaningless.
Today, economic interdependence between Europe and Russia is much greater than it was during the Cold War. The aggregate numbers suggest that Russia would have much more to lose than Europe if sanctions were imposed. The European Union is Russia’s biggest trading partner, accounting for 41 percent of all its trade. However, aggregate numbers do not say much about the position of individual states and firms. Germany has ten times more firms invested in Russia than any other European country, and German exports to Russia totalled €38 billion in 2013, the highest in the EU. Proponents of German industry warned about a threat to 300,000 German jobs even before the MH17 plane crash. This means that any talk about sanctions without the consent of Chancellor Angela Merkel is meaningless. If Germany will not shoulder the burdens of sanctions, neither France, Italy, Greece nor Hungary will. It is easier for the US to talk about sanctions, because it has very little trade with or investment in Russia. But sanctions imposed by the US alone will have only a symbolic impact on Russia and will cause friction with Europeans – just as they did during the Cold War.
Lesson 2: Targeting the energy trade is tricky
During the Cold War, most Western trade restrictions were aimed at preventing the free flow of technology to the Soviets. This involved not only an embargo on military technology, but also on dual-use technology, that is, on civilian technology that has potential military applications. The block on dual-use technology was controversial, but the Europeans reluctantly accepted it, with one notable exception. When the Americans decided to apply technological restrictions to the energy sector, Europeans rebelled. The Soviets were heavily reliant on the hard currency earnings they received from supplying gas and oil to Europe. But this was also the sector in which Western Europeans were most engaged – and thus most vulnerable. Confrontation between the US and Europe came when the US tried to involve itself in the sector.
The Trans-Siberian Pipeline was seen as the key channel for gas supplies. This project was financed by German, French, and Japanese banks and the pipeline was constructed by numerous European companies. After General Wojciech Jaruzelski crushed Poland’s independent trade unions in 1980-1981, the Americans decided to target the construction of the pipeline with sanctions in an effort to punish Moscow for orchestrating the repressions in Poland. Many European leaders considered this a step too far and a severe crisis in transatlantic relations followed. The pipeline was eventually constructed with only a short delay, even though the US government placed sanctions on several European companies for their involvement in the project.
Putin has played one EU country against another in a way that even his Soviet predecessors could not do.
Restricting trade in the energy sector would hurt Putin and his regime more than any other sanction. However, Europe seems more dependent now on Russia’s energy supplies than it was during the Cold War. Some new EU members are totally dependent on Russian gas supplies. Germany receives more than 30 percent of its oil and gas from Russia. With the help of Gazprom, Putin has played one EU country against another in a way that even his Soviet predecessors could not do. He managed to build a direct link to Germany with the North Stream pipeline and is now making progress on the South Stream pipeline, which would bypass Ukraine and Poland with the help of Austria and Bulgaria. At the same time, Putin has more or less killed off the Western-backed Nabucco pipeline project, ensuring that Caspian gas gets to Europe only through Russia.
European leaders will only be able to think about targeting the energy trade with sanctions after they manage to diversify their supply sources. This will be time-consuming and costly. So far, the EU has not even been able to enforce its competition laws in order to prevent Gazprom from fixing prices at its own discretion. Nor could the EU succeed in creating a single European agency that would take charge of buying Russian gas and oil. Such relatively benign regulatory steps would have a greater impact on Russia than would targeting Putin’s friends with asset freezes and travel bans.
Lesson 3: Strategy is important
How useful sanctions are is a matter of perception rather than of science. Those who expect to shoulder the burden of sanctions are likely to oppose them. Dutch public opinion has been extremely shaken by the MH17 plane crash, but even so, the head of Dutch mega-firm Philips, Frans van Houten, has said that sanctions should not be considered before all the facts are known. Mr van Houten, along with Mr Putin, knows well that some facts will never be established for certain. However, the experience of the Cold War suggests that opposition to sanctions can be mitigated by providing a sound strategic rationale.
In the 1960s, a lively political debate was already going on between those who argued that trading with the Soviet bear made it more prosperous and thus more dangerous, and those who believed that a more prosperous bear would be also more amiable. Some argued that mutual interdependence made the West more vulnerable to Moscow, while others argued that interdependence made Moscow more cautious. NATO’s Harmel Report in 1967 tried to square the circle, declaring that the West needed to employ both deterrence and co-operation in its relations with Moscow. Trade embargoes do not preclude co-operation, nor does co-operation rule out the possibility of trade embargoes.
This double-track policy was particularly tested at the time of the transatlantic row over the Trans-Siberian Pipeline. But it survived, largely thanks to Germany’s resolve to stay the course. As German Foreign Secretary Hans-Dietrich Genscher put it at the time:
“Maintaining the Western readiness for trade means maintaining the offer of co-operation and constantly reminding the Soviet Union of the possibility of comprehensive East-West economic co-operation – that is, if the Soviet Union abandons its policy of predominance and seeks ‘genuine coexistence’.”
Germany is the unquestionable leader of Europe, and its leaders must not act in a parochial, selfish way.
Today, this double-track policy is probably the only way to face down Putin’s ever more adventurist policy. Europe is especially vulnerable in the energy field, and European states have different interests. Moreover, Washington’s ability to get Europeans to agree on one policy line is limited or non-existent. However, business as usual is not an option after the Russian annexation of Crimea and the shooting down of MH17. Trade has always been a policy instrument and the energy trade has always had important security implications. Today, Germany is the unquestionable leader of Europe, and its leaders must not act in a parochial, selfish way. They need to generate security and stability for the entire continent. Appeasing Russia will only encourage Putin to continue his adventures. Putin needs to be given a signal that Europe is united and is determined to match his power. Therefore, Germany should take the lead on sanctions whatever the costs involved and whatever its own domestic concerns. It should also make it clear to Europe’s hawks, from Poland to the United Kingdom, that normal trade with Russia will resume as soon as Putin stops destabilising Ukraine.
Trade is a double-edged sword that ought to be used cautiously. Targeting energy is particularly risky. But the West must at times apply economic sanctions in order to deter further Russian adventures and, by the same token, to enhance prospects of future co-operation. The Cold War taught us this, and the lessons are still valid in the post-Soviet world.
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