Effectiveness of Economic Sanctions on Russia’s Economy

In early 2015, Western leaders thought they had Russia cornered.  A year earlier they imposed on Russia economic sanctions, which ranged from restrictions on access to Western capital markets to bans on the export of oil-production technology, to punish it for its role in dismembering Ukraine.  Those sanctions and the Russian boycotts that followed threw Russia’s economy into turmoil.  With some justification, President Barack Obama declared that “Russia is isolated with its economy in tatters” in January 2015.  But two years later, Russia has stabilized its economy, annexed Crimea, and kept its “little green men” in eastern Ukraine.  What went awry?

Peak Pain

In financial terms, Russia felt the most damaging impact of the West’s economic sanctions within the first year of their imposition.  Suddenly, Russian companies, holding dollar and euro-denominated debt, had to repay their loans without the ability to refinance them.  Russian banks targeted by Western sanctions saw their overseas assets frozen.  That created a cash crunch.  Many companies were forced to suspend operations and slash jobs; some even required government capital injections to survive.  But they did survive.

Commodity Price Stabilization

Unfortunately for Russia, the West’s economic sanctions coincided with a steep drop in global oil prices.  That, more than anything else, exacerbated Russia’s economic woes, since much of the country’s economy depends on the production of commodities, primarily oil.  Oil prices plummeted from over $100 per barrel to under $35 per barrel in late 2015.  But then they began to recover the following year.  So too did the prices of other major commodities that Russia produces, including iron, aluminum, and copper.  No doubt global economic growth, which boosted commodity prices, helped Russia to better ride out Western sanctions.

Floating Currency

But the stabilization of commodities prices did not save Russia’s economy.  With economic sanctions darkening the country’s outlook, the value of the Russian ruble was cut in half.  At first, Russia’s central bank tried to defend it, consuming $200 billion in foreign exchange reserves in the effort.  But ultimately, Russia’s central bank took a leaf from the International Monetary Fund’s market-based playbook and allowed the Russian ruble to float.  That freed Russia’s central bank from having to defend the ruble and prevented an even greater outflow of hard currency that would have further undermined Russia’s economy.

Moreover, since commodities are generally priced in dollars, the sharply devalued ruble meant that though Russian companies faced falling prices for their goods, the dollars they did receive could be converted into more rubles.  That softened the economic blow—enough so that Russian energy companies could continue to reinvest in their businesses.  As a result, despite the sanctions on oil-production technology, Russia is able to produce more oil today than it did before the sanctions were imposed.

Inflation Control

With shortages of imported goods and more rubles in circulation, inflation became a real threat.  Rising prices ate away at the purchasing power of ordinary Russians.  But rather than reflexively enact price controls, Russia’s central bank used another market-inspired lever.  It raised interest rates, up to 17 percent by December 2014.  Credit naturally dried up, further depressing the Russian economy.  But fortunately for Russia, inflation was quickly brought under control.  That allowed Russia’s central bank to gradually lower interest rates to 10 percent, giving Russian companies much-needed breathing room to recover.

Fiscal Discipline

In the depths of its economic recession, Moscow could have increased government spending to boost economic activity.  But with falling revenues from Russian oil production, a surge in spending would have pushed Russia’s government budget deep into the red and fueled a potential economic crisis.  Instead, Moscow exercised fiscal discipline.  It held its spending in check and ran a budget deficit of only 3 percent of Russia’s GDP last year.  When more funds were needed, Moscow raised taxes and dug into its two sovereign wealth funds, draining a third of their assets before oil prices stabilized.

Wavering Western Resolve

Meanwhile, European companies, particularly German ones, gave Moscow hope.  They were never keen on the economic sanctions against Russia.  From the start, they lobbied German Chancellor Angela Merkel to water them down.  After they were imposed in 2014, German direct investment into Russia evaporated.  But only a year later, German companies returned, investing $1.8 billion into Russia.  Last year, they invested another $2.1 billion, more than they had in the year before economic sanctions were imposed.  Such continued investments have encouraged Moscow to question the strength of Western resolve.

Conclusion

The West’s economic sanctions have bent but did not break the Russian economy, despite its structural vulnerabilities.  What steadied it was a combination of several factors, the most important of which were the stabilization of global commodity prices and the market-oriented policies implemented by Russian authorities.  They made Russia’s economy more resilient and prevented an even deeper recession.

Ultimately, economic sanctions can make countries more vulnerable to global economic forces.  But rarely do they deliver a knockout blow themselves.  Western economic sanctions against Russia have proven the rule, rather than the exception.  Ironically, the West’s success in spreading open-market ideas at Russia’s central bank may have inadvertently weakened the effectiveness of its own economic sanctions.  If so, the further spread of such ideas could make economic sanctions even less effective in the future.

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Are You Staying, Or Just Passing Through? The Geopolitics Of Asylum

European politics have been roiled over the past few years by the question of how the EU as a whole and its individual member states should deal with refugees seeking asylum from the ongoing wars throughout the Greater Middle East. Most attention has been focused on the stream of unfortunates coming across Turkey and the Aegean from Afghanistan, Iraq, and especially Syria. Their stories have tugged at European heartstrings, even as some have worried that the crowds of apparent refuges could also include potential terrorists.

Germany in particular has chosen to accept hundreds of thousands of refugees. Chancellor Angela Merkel’s confident proclamation “Wir schaffen das” (We can handle it) has earned her praise from humanitarian groups but also brickbats from analysts and political critics who claim she has undermined national security in quixotic pursuit of moral redemption for the German people’s historical sins.

At the root of the debate has been the question of German and European responsibility for helping the victims of wars on Europe’s periphery—wars in which Europe has been unwilling or unable to take an active role—and the potential danger such migrants pose to European society. Critics of Merkel’s policy point to recent terror attacks as proof of the dangers of unchecked immigration, and argue for robust interdiction and higher fences.  Supporters of a more open policy, such as Assistant Secretary of State for Democracy, Human Rights, and Labor John Shattuck, have argued the opposite, that accepting refugees will allow Europe (and the United States as well) to display their commitment to human rights, counter Islamist assertions that the West is at best indifferent and at worst actively hostile to the well-being of Muslims, and thus actually enhance both the reputation and the security of the West. 

So far, neither side in the debate has scored an undisputed victory, and it is unlikely that they will any time soon. But the discussion of migration and asylum, so focused on the actions of European governments, often leaves out the actions of the migrants themselves.  Although one will occasionally see discussions of the need for the refugees and asylum seekers themselves to integrate into European culture, the primary policy question for Europeans has been framed as “do we let them in or not?”

The closer one looks, however, the more one sees that it is not just a matter of who comes in, but how they come and go once they have found asylum, and the political activities they choose to engage in while enjoying the protection of that status.

All of which leads us to the saga of Yahya Badr al-Din al-Houthi. Al-Houthi is a Yemeni activist, the brother of the leader of Yemen’s Houthi rebels, currently involved in a bitter civil conflict with the government of Yemen. That conflict has developed into a proxy war between Shiite Iran (which backs the Houthis) and the Sunni monarchies of the Gulf, led by Saudi Arabia, which backs the Yemeni government.

[For those interested in more detail, the conflict in Yemen was the subject of the February 2015 episode of FPRI’s “Geopolitics with Granieri,” which addressed its local, regional, and global complexities.]

Al-Houthi’s exploits have recently been the subject of a two-part summer series in the print edition of the Saudi news magazine Majalla (available in English as well as Arabic). The series highlights the significant questions about German capacity and willingness to hold political refugees to the legal conditions of their stay, and the implications for this case for future asylum policy.

Although even less well known to American audiences than the Syrian Civil War, the war in Yemen has entered its second year with no clear end in sight, and is producing its own flow of displaced refugees. Its wider implications have also increased the significance of Houthi activists abroad. Al-Houthi himself fled Yemen more than a decade ago, and found political asylum in Germany.  Far from staying out of the politics of his homeland, however, al-Houthi has been an active supporter of the rebel cause, appearing on a variety of media outlets (including the Arabic service of Deutsche Welle, Germany’s version of the Voice of America), meeting with Iranian representatives and other supporters of the Houthi cause, including Hezbollah, and even traveling back and forth to Yemen to participate in the rebellion.

Such activity stretches the legal meaning of asylum, and poses a difficult political problem for the Germans. There is of course historical precedent for rebel groups and self-styled “governments in exile” to set up shop abroad. Usually, however, such actions depend upon the formal approval of the foreign host. The Germans have extended no such formal support to al-Houthi and his compatriots, but at the same time they have not acted to shut down his behavior either. Either decision would bring political challenges that Berlin appears to prefer to avoid. The resulting ambiguity, however, is not only embarrassing for the German authorities, but also raises uncomfortable questions about the broader responsibility of even the most welcoming governments for the political activities of those whom they chose to shelter.

In this atmosphere of increasing tension about how to deal with the challenge of integrating political migrants and asylum seekers, European policy discussions should include an understanding of this particular case. So far, it offers no satisfying solutions, but many questions well worth pondering.

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Why the US doesn’t have a Muslim problem, and Europe does

I’m first generation American, with a Pakistani-born father. My dad and his older brother both left Pakistan at the same time, but that is where their similarities end. My uncle, an engineer working for the German Space Agency, never felt German. His son avoided mandatory German military service and struggled with finding his identity. My father, on the other hand, came to the United States on a Fulbright scholarship, ran a successful business, raised two sons (one of whom joined the United States Navy), and proudly votes in every election be it local, state or federal. The contrast between these two brothers is why Europe has a Muslim problem. It’s not the influx of Muslims; rather, it’s Europe’s inability to welcome and assimilate immigrants. The resulting racial tension creates a perfect recipe for ISIS recruitment among disenfranchised young men. America is doing it right, and we cannot repeat the European model.

Officials believe that over 5,000 Western Europeans have made their way to Syria to support ISIS. However, the actual number is considerably higher according to the Soufan Group, with several European countries contributing a disturbing number of fighters to ISIS: France (1700), Russia (2400), UK (760) and Belgium (470)[1]. For a country like Belgium with only 11 million citizens, having almost 500 citizens join ISIS is a shockingly high number. Furthermore, large pockets of Muslims are concentrated in cities like Brussels where more than a quarter of Belgium’s Muslim population resides. These heavily concentrated Muslim enclaves, according to a 2007 report from the Centre of European Policy Studies, are more likely, than the EU general population, to be poor, segregated and crime-prone neighborhoods[2].  But the question remains, why is this trend of European Muslims joining ISIS happening now?

With the crisis in Syria, Europe has received a massive influx of Muslim refugees. However, with 19 million Muslims in Europe, have the refugee numbers contributed to ISIS’ recruiting efforts? The short answer is no. Of the UN reported 4.2 million Muslim refugees, only 850,000 have fled to Europe. While this is a large number of refugees a large number are women and children, with only 62% being men[3]. The reality is that the Muslim migration started long before the crisis in Syria. In fact it grew as a result of an influx of foreign workers taking advantage of lax guest worker programs after the Second World War. Originally meant to be temporary, these workers became permanent and brought with them waves of descendants. Once settled these immigrants did what first generations immigrants do: they had babies. As a result the Muslim population has been steadily growing, not from immigration but by births. The increase in the number of Muslims is a pattern that is expected to continue through 2030, when they are projected to make up 8% of Europe’s population.  Even though the population has been steadily growing the consistent poverty has contributed to racial tensions between Muslims and Europeans even well before the Paris attacks.

Unlike Europe, the US has a very different track record with Muslim immigrants. According to the Pew Research Center there are 3.3 million (or 1% of the population) Muslims living in the US. Furthermore, in the US Muslims make up 10% of US physicians, are the 2nd most educated group after the Jewish population, are as likely as other American households to report an income of $100,000 or more, and over 6,000 serve in the military[4].  The report found that Muslim Americans are “highly assimilated into American society and . . . largely content with their lives.” Unlike European Muslims the report also found that 80 percent of US Muslims were happy with life in America, and 63 percent said they felt no conflict “between being a devout Muslim and living in a modern society.”[5] Furthermore, this integration into American culture and society, according to the report, is evident in the rates they participate in various everyday activities such as following local sports teams or watching entertainment TV — all similar to those of the American public generally. Lastly, most telling of their loyalty and sense of inclusion, according to the Pew report, is that half of all Muslim immigrants display the US flag at home, in the office, or on their car.[6] It is this sense of inclusion that in large parts contributes to the fact that only an estimated 250 Americans have joined ISIS – a number far less than the number of Belgium citizens who have gone to Syria and Iraq.

My uncle was one of the immigrants who came to Europe under the guest worker program. Unlike current refugees, neither her nor my father were fleeing war; instead they left to pursue professional careers. My uncle was an educated and a skilled worker who climbed the ranks of German’s fledgling space agency to hold a senior scientist post. While he was professionally successful, his children, who were both born in Germany, struggled. They still feel they are outsiders, not quite German but definitely not Pakistani — a feeling that is repeated as they have children of their own. This experience juxtaposed with that of my father shows a clear difference. Even though I was raised in a predominantly white New York City suburb, I was never considered anything other than American. It is treatment that is extended to my children who, like the subsequent descendants of immigrants, are only aware of the ethnic roots as a distant fact. This is the fundamental difference between European and American Muslims: the ability for American Muslims to assimilate. It is an ability that is key to winning the battle with ISIS, which relies on a steady stream of volunteers. As such, as long as Europe continues to make it difficult for Muslims to integrate and assimilate, ISIS will have a pool of disenfranchised and angry young Europeans from which to recruit.

Naveed Jamali is a Senior Fellow in the Program on National Security at the Foreign Policy Research Institute and an author of How to Catch a Russian Spy: The True Story of an American Civilian Turned Double Agent.

NOTES

[1]The Soufan Group, “Foreign Fighters: An Updated Assessment of the Flow of Foreign Fighters into Syria and Iraq”, http://soufangroup.com/wpcontent/uploads/2015/12/TSG_ForeignFightersUpdate_FINAL3.pdf, (December 8, 2015).

[2]Richard Youngs and Michael Emerson, “Political Islam and European Foreign Policy: Perspectives from Muslim Democrats of the Mediterranean”, https://www.ceps.eu/publications/political-islam-and-european-foreign-policy-perspectives-muslim-democrats-mediterranean,  (28 November 2007).

[3] FactCheck.org, “Facts about the Syrian Refugees”, http://www.factcheck.org/2015/11/facts-about-the-syrian-refugees/, (Posted on November 23, 2015).

[4] Pew Research Center, “Muslim Americans: Middleclass and Mostly Mainstream”, http://www.pewresearch.org/files/old-assets/pdf/muslim-americans.pdf, (May 22, 2007).

[5] Pew Research Center, “Muslim Americans: Middleclass and Mostly Mainstream”.

[6] Pew Research Center, “Muslim Americans: Middleclass and Mostly Mainstream”.

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