EU sanctions on Russia hurt more than it seems
“Sometimes a stick in the air is better than a stick on the head”.
Words of wisdom from Avi Dichter, a former chief of Israel’s internal intelligence service, the Shin Bet, who knows a thing or two about psychological warfare.
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He was speaking in Brussels - at the outset of the Syrian war - on the deterrent effect of potential EU sanctions.
The EU "sticks" did nothing to help.
But the Western stick over the head of Russian leader Vladimir Putin is heavier and east Ukraine is not Syria: Putin can switch off the killing. He does not face an existential threat if he does.
The EU has been playing psychological games with the Kremlin for the past three months.
Following MH17, the stick - the threat of economic sanctions - is poised to strike a blow on Tuesday (29 July) against Russia’s “access to capital markets, defence [contracts], dual use goods, and sensitive technology including in the energy sector”.
It is likely to disappoint EU hawks.
There will be limits on the kind of debt that Russian firms cannot buy, loopholes for France to deliver a warship to Russia, and language on the “reversibility” of sanctions if Putin makes nice.
But even if the physical pain is small, the pain of the “uncertainty” of future Western action is just as real and increasing by the day.
Last week EU sources - for the first time in the crisis - leaked a paper on sanctions options.
It includes, as a last resort, “capital market restrictions … prohibition of new investment in Russia … an import ban on gas … [and] an import ban on oil”.
Later the same week, they leaked a second paper on the options currently under consideration.
They include a ban on Russian state-owned banks’ buying of long-term bonds from EU banks. But the paper notes the ban might be extended to EU sovereign bonds and to other Russian firms.
It adds that the idea is to “foster a climate of market uncertainty that is likely to affect the business environment in Russia and accelerate capital outflows”.
Risk is back
Senior EU and US diplomats are meeting every week to co-ordinate the message on Russia: that political risk is back.
They are telling journalists that allies - such as Japan, Norway, Singapore, or South Korea - might take additional, unspecified steps.
The US earlier this month also imposed mini-restrictions on capital access for four Russian firms, while threatening more to come.
Its top diplomat on Ukraine, Victoria Nuland, told press its target audience was not the Kremlin.
“The reaction of the markets is perhaps more important than the reaction by Moscow … It will take time for this to have an impact on his [Putin’s] geostrategic calculations. I don’t think anyone expected a change in policy overnight”, she said.
Unlike the Shin Bet's “stick,” Nuland described the creation of market uncertainty as “a scalpel … a new tool of European and US foreign policy”.
Putin himself, a former spy chief, tends not to blink. According to the British daily, The Times, his trainers in what was then called the KGB said he has “a lowered sense of danger”.
Ordinary people who live in former Soviet states also have a high pain threshold.
Back in 2006, when the EU began to impose sanctions on Belarus, a 60-year old taxi driver in Minsk told EUobserver: “Look. What do I care? So long as there is no war, and I can get potatoes, hot water in winter, and a bottle of vodka - I don’t need much more”.
But the psychology of international markets and of the new Russian elite is different.
Risk premiums on investments in Russia are going up, the value of the ruble is going down, Russian GDP growth is cooling, and capital outflow is rising.
A senior source in one Western multinational firm, which is in talks with a potential Russian partner, told this website: “I’m not sure what these sanctions really mean. But it makes me feel uncomfortable”.
A contact at one large German bank added: “A general feeling of uncertainty is enough to hinder investment”.
For its part, the Russian central bank on Friday raised interest rates to attract foreign speculators, who will get a bigger return on ruble-denominated financial instruments.
But a source at one big Swiss bank noted the move will have the “opposite effect” on the Russian domestic economy, where firms will have to pay more for their loans.
The bank contacts did not want to speak on the record because of the “sensitivity” of the subject.
It is normal for some sources to be shy. But the heightened level of sensitivity is linked to the heightened level of uncertainty on doing business with Russia.
Meanwhile, in terms of soundbites, not everybody is happy with potatoes and hot water.
One EUobserver contact recently overheard a Russian family checking out of a top hotel in London. The clerk declined their credit cards because she had heard that Russia-linked Visa and Mastercard transactions “might be under some kind of sanctions”.
“Look what Putin is doing to us!” the Russian hotel guest said.
A Western diplomatic source in Moscow added that even ex-KGB hardmen are not immune to concern.
“It’s clearly beginning to hurt. The EU and the US have shown they are willing to go after big fish ... The talk of the upcoming EU package [of sanctions] has made an impact on the boss [Putin] and on his immediate entourage”, the contact said.