US sanctions against Russia prove globalisation’s mettle

By Brigitte Granville

The latest American sanctions salvo against Russia announced on 6 April amounts to a major escalation in the economic war which – with real, and potentially nuclear, war being unthinkable – has been the preferred response of US and EU to the geopolitical challenge from Russia that began with the annexation of Crimea in 2014. There is more to these sanctions than geopolitics, however. They also teach us an interesting lesson about globalisation.

To understand that lesson, we must first establish how these new sanctions differ from the previous ones imposed at various times since 2014. In economic terms, the only kind of sanctions that count are those targeting (Russian) companies rather than individuals, whether big business owners (‘oligarchs’) or officials. Until this month, the scope of sanctions against various Russian companies was tightly defined and limited. Typically, sanctions prohibited lending to those companies (except for the shortest maturities) and, in the case of the oil companies on the list, the transfer of certain technologies that would help the Russian oil industry accelerate development in new areas such as deep-water and tight oil drilling. In the case of the companies included on the latest US sanctions list – owned by two Russian tycoons, Oleg Deripaska and Viktor Vekselberg – the measures are much more comprehensive. Any type of transaction with those companies is prohibited.

Granville_Pic_27APR2018
© REUTERS / Maxim Shemetov

The second big escalatory change is that the US is now applying for the first time to the Russian case its practice of asserting extra-territorial jurisdiction. Sanctions mandated by the UN Security must be complied with by all countries as a matter of international law. By contrast, in the case of sanctions imposed by a single country – this latest case is an instance of extreme unilateralism by the US, by-passing not only the UN but also America’s allies – only the citizens and companies of that country need comply. However, the US is threatening to penalize anyone in the world doing business with these sanctioned Russian companies. These ‘secondary sanctions’ include denying violators access to the territory, markets and financial system of the US. Such is the importance of the US – and especially the global dollar-based financial system – that this amounts to a powerful deterrent.

Of the various Russian companies targeted by the US on 6 April, the most important for the global economy is Rusal, the Deripaska-controlled producer of aluminium and that metal’s precursors, alumina and alumina oxide. Rusal produces far more metal than required by domestic customers in Russia and has a 6% share of the global market. By preventing all Rusal’s global customers from doing further business with the company, the US sanctions have in effect crippled the company.

This is a serious blow not only to Rusal but also the Russian economy. The 80% of Rusal output that is exported generates about US$8 billion of annual sales and US$2 billion of tax revenue for the Russian state budget. Rusal employs directly about 60,000 workers, with another 100,000 or so indirectly exposed to its operations.

The trouble for the US and its allies is that just as globalisation benefits all participants, so sanctions – which amount to de-globalisation – have an equivalent mutual, though now negative, effect. The effects are, of course, uneven. To the extent that sanctions are always a two-edged sword, the main cutting edge slashes at the target economy (Russia); at the same time, the other edge threatens self-harm.

This harm has been felt first through a 30% spike in the aluminium price (see chart). It is not hard to see why Rusal was selected by the Trump administration as the main target of this major sanctions escalation against Russia. This is consistent with aluminium being (along with steel) a core focus of the Trump administration’s protectionism. But that price jump may have been more than the administration bargained for, as it will cause more pain to US industry than the mild price rises envisaged from the announced tariff hike on imports of aluminium designed to help domestic producers of the metal.

Granville_Chart_27APR2018

More serious problems arise where physical supply chains are jeopardized. Here European countries – which, as mentioned were not even consulted by the US over these latest sanctions – are in the frame, as Europe’s automotive and aerospace sectors depend heavily on alumina supplies from a Rusal production subsidiary in Ireland. While supply chains can eventually be re-routed to avoid such roadblocks, this might not be achievable in time to save various European manufacturing plants from closure. The Financial Times quoted an anonymous French official as saying that such plants are “not the kind that can be re-opened overnight”.

This resulted in intensive European lobbying of the US against these sanctions. In an op-ed article in The Independent, Nigel Gould-Davies, a Russia expert at Chatham House, celebrated the sanctions, and called on Europe to follow the example of the US in being “prepared to accept costs” when inflicting sanctions. Mr Gould-Davies spoke too soon. By 23 April, the US Treasury had started to row back. In the face of that European lobbying, the US government extended by six months – until October – the deadline to wind up dealings with Rusal group entities. At the same time, Treasury Secretary Steven Mnuchin added something more significant. He said that the US was not targeting the “hard-working people” who work for, and with, Rusal; and he indicated that if Deripaska were to cease being the owner of Rusal, the sanctions against the company might be eased or even removed.

The lesson of all this is that sanctions against even one of Russia’s large industrial groups that are significant players in global commodity markets are simply too painful for everyone to be sustained. If this goes for a Russian company with a 6% share in a globally traded basic industrial metal, how much more true would it be if similar sanctions were ever to be launched against the Russian oil industry which, producing 11 million barrels of oil per day, accounts for 13.5% of global crude production. Russia is not Iran. The scale of its integration into globalized materials markets makes the cost of sanctions incommensurate with the stated goal of using such punitive measures to induce Russia to change its foreign policy.

Two concluding remarks.

There is a rich irony in the latest US position that Deripaska should divest his assets. It has often been said – and with considerable justice – that modern Russia’s economic prospects are held back by weak property rights and that Russia is a kind of feudal system in which property is held at the pleasure of the Tsar (“Kremlin”). This notion underpins the whole US strategy of countering Russian state policies and actions to which the US objects by sanctioning oligarchs. But now, we see the White House supplanting the Kremlin. For it turns out that the oligarchs are merely feudal tenants holding their assets at the pleasure of Mr Trump.

In his Independent column, Mr Gould-Davies characterizes Russia’s approach to using globalized economic relations as a source of influence in contrast to the West’s “rules-based integration”. This latest sanctions episode shows the US aggressively resorting to what Mr Gould-Davies calls the ‘Russian approach’ in a pure power play recalling Lenin’s key to political struggle: “Who whom?”

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