Political Economy of the Sanctions on Russia

U.S. goods and services trade with Russia totaled an estimated $34.6 billion in 2018. Exports were $11.6 billion; imports were $23.0 billion. The U.S. goods and services trade deficit with Russia was $11.4 billion in 2018.

Russia is currently our 28th largest goods trading partner with $27.5 billion in total (two-way) goods trade during 2018. Goods exports totaled $6.7 billion; goods imports totaled $20.9 billion. The U.S. goods trade deficit with Russia was $14.2 billion in 2018.

Trade in services with Russia (exports and imports) totaled an estimated $7.0 billion in 2018. Services exports were $4.9 billion; services imports were $2.1 billion. The U.S. services trade surplus with Russia was $2.8 billion in 2018.

According to the Department of Commerce, U.S. exports of goods and services to Russia supported an estimated 66 thousand jobs in 2015 (latest data available) (36 thousand supported by goods exports and 30 thousand supported by services exports).

• The United States imports about 62 million barrels of crude from Russia per year or five days of U.S. import.
• The United States imports about 5% of Russian oil.

• The United States produces more gas than Russia. Russia does need U.S. fracking technology because of the type of deposits they have.
• EXXON was engaged in the development of the Arctic oil and gas deposits—this has been suspended.
• Boeing is not allowed to sell or lease planes to Russian state and private airlines.

The US has a total embargo on Iran. Russia broke the Iranian embargo and in 2016 and delivered S-300 air defense missile systems to Iran. More than 70 percent of Iran's arms imports came from Russia. Iran claimed it needed them to protect their nuclear facilities against possible Israeli attack. Russians have violated the agreement on the Intermediate-Range Nuclear Forces (INF). Medium range nuclear-tipped cruise missiles can threaten NATO in Europe. President Trump abandoned the INF treaty.

According to Forbes 2019 half of the foreign investments in Russian stock market came from the United States. U.S. foreign direct investment (FDI) in Russia (stock) was $14.8 billion in 2018, a 6.6% increase from 2017. U.S. direct investment in Russia is led by manufacturing, wholesale trade, and nonbank holding companies.

Russia's FDI in the United States (stock) was $4.6 billion in 2018, up 2.6% from 2017. There is no information on the distribution of Russia FDI in the United States.

Sales of services in Russia by majority U.S.-owned affiliates were $9.7 billion in 2017 (latest data available), while sales of services in the United States by majority Russia-owned firms were $629 million.

• Since 2016 NASA has spent about $4 billion in Russia to service the U.S. space program.
• After retiring the shuttle, NASA was relying on the Russians for the exchange of the crew at the international space station. In 2020 NASA switched to SpaceX and other U.S. delivery systems.

The SALT agreement is in force but needs extension. The INF Treaty has been abrogated.

Since 2014 U.S. policy has been that Russia is in violation of the international law by forceful annexation of the Ukrainian territory of Crimea. Ukraine received a $400 million dollar weapons systems grant from the United States in 2019. The delay in the passing of the grant to Ukraine was the main issue of the impeachment proceeding against President Trump.

The United States bears small international costs. Russia has friends in Cuba, Latin America, and China; but none of these countries will sever relations with the United States because of the sanctions on Russia.

The EU looks to U.S. leadership on the sanctions. The main supporter of continuation of the sanctions in the EU, Great Britain, has been in the process of leaving the Union. Chancellor A. Merkel and President E. Macron have expressed their support of the sanctions as of mid-2020.

• In 2013 German exports to Russia were $40 billion; in 2019 they were about $30 billion. German imports and exports moved to Asia and were reduced.
• Russian consumption and investment stagflation (GDP slow growth and inflation) reduced demand for German imports. Germany steadily increased their import of Russian energy and minerals.

26 percent of Russian gas export goes to Germany. Around 40 percent of German energy consumption (gas and oil) comes from Russia. Two North Stream 1 and 2 pipes under the Baltic Sea connect Russian sources with German North Sea ports. There are no suitable alternatives in sight that could cover shortfalls of this magnitude if more sanctions were imposed on Russia.

More than 6,000 German companies are registered in Russia and, together, they have invested €20 billion in recent years. German chemical giant BASF has holdings in Siberian gas fields and Russian gas monopoly Gazprom obtained natural gas storage facilities in the state of Lower Saxony in exchange. Without special chemicals from Germany, it would be difficult for Russia to refine its crude oil. It would be a shattering blow for many industries in both countries if Chancellor Merkel were to turn the screws on Germany-Russian economic relations.

A $163 million high-tech military training facility built in Russia by the German defense contractor Rheinmetall was near completion when German Economy Minister Sigmar Gabriel halted work on it in 2014, citing the situation in Crimea. Since then there has been no cooperation in military technology between the two countries, and in 2015 there was a Russian cyber attack on the Bundestag information system.

Despite the EU sanctions upon Russia, German businesses invested more than €3.3 billion ($3.7 billion) in Russia in 2018, reaching the highest levels in a decade and exceeding numbers not seen since Russia’s annexation of Crimea in 2014, according to data from the Russia-German Chamber of Commerce. German investment into Russia had increased by 20% the previous year illustrating the opportunities that remain in Russia for foreign investors.

It does not exist.

In order of acquisition of nuclear weapons these are: the United States, the Russian Federation (successor state to the Soviet Union), the United Kingdom, France, and China. Germany does not have nuclear weapons.

Germany needs Russian energy and a stunning 54% of Germans believe the EU and US should accept Russia's annexation of Crimea. The shooting down of the civilian aircraft by the rebels in Ukraine has changed this equation, but Germans continue to view energy imports from Russia very favorably as they embark on the total renunciation of nuclear energy by 2030.

In 2014, Gernot Erler, the German government’s coordinator for relations with Russia, said that the U.S. sanctions on Russia were counterproductive and probably wouldn’t make President Vladimir Putin bow to Western demands on Ukraine. In May 2020 Chancellor Merkel asked for new sanctions on Russia as the evidence of the 2015 cyber attack on Bundestag emerged.

Until recently Germany wanted to be independent from the United States, but wanted the U.S. military umbrella, which saves them money on defense and creates the image of a peace-loving country. Recently, diplomatic ties between Washington and Berlin have declined markedly. Disagreements over defense spending, energy infrastructure, the G-7, and trade continue to be problems. President Trump says Germany is being delinquent on NATO costs and decided to remove 10,000 U.S. troops from Germany. Germany spent an estimated 1.38% on defense spending in 2019, according to NATO estimates, whereas the U.S. spent 3.42%. Germany said last year that it aims to meet the 2% target by 2031. Trump said in 2018 that the Germany energy market was “totally controlled” by Russia and in December 2019, the United States slapped sanctions on the North Stream 2 project. Berlin responded by saying that “European energy policy must be decided in Europe, not the U.S.”

• With a population that stood at 146.8 million in 2018 (IMF, 2019), Russia is the UK's 21st largest trading partner (ONS, 2019). The total trade in goods and services between the United Kingdom and Russia was £15.3 billion in the year to June 2019 (ONS, 2019). In 2013, before imposition of the EU sanctions, Russia was the second biggest export destination, outside of the EU, for cars built in the United Kingdom, accounting for 9.5% of all vehicle exports.
• The United Kingdom also supplies business and financial services, worth almost £2 billion in 2019. Rachel Davies, head of advocacy at Transparency International, says the group has found £4.4 billion worth of U.K. property that is owned with suspicious wealth, a fifth of it owned by Russian individuals (2018).

• Imports to the EU from Russia are dominated by crude oil and gas. According to the Energy Information Administration (EIA), European countries import 84% of Russia's oil exports, and about 76% of its natural gas.
• Germany is the single biggest importer of Russian oil and gas, while the U.K. buys about 6% of Russia's gas.

• The BP owns an almost 20% share in the biggest Russian oil producer, Rosneft, which, in turn, generates 5% of profits for the British-owned company.
• British firms have been encouraged to explore new trade opportunities with Russia. Those U.K. companies who have bucked the trend and stayed in Russia— including giants like BP, Jaguar Land Rover and British American Tobacco,—are now some of the loudest champions for doing business in Russia.

After the assassination attempt on Mr. Scripal on British soil by GRU agents, Russia started a six-month propaganda war with Britain. “No matter what action you take against Russian intelligence services, they are going to put a massive amount of resources into a divergence campaign,” said Bill Evanina, the head of counterintelligence for the U.S. government. “Vladimir Putin's most amazing trait is his ability to deny the facts.”

The United Kingdom also benefits from Russian investment, which in 2011 amounted to $11 billion. It was the sixth biggest beneficiary of Russian investment—Cyprus received the most at $122 billion. Investments in Cyprus originate from Russian businesses taking advantage of the country's financial system and favorable tax conditions.

The United Kingdom is number one in the word in small satellite technology and number one in Europe for telecommunications satellites, whilst Russia is responsible for 40% of all space launches globally and has ambitions to become one of the top three space nations to gain a 10% share of the global space market by 2030—the same target as the UK’s—so UK and Russia are ideal partners in space (from the British press). A Russian carrier rocket has successfully delivered 34 communications satellites of the British company OneWeb into orbit, the Russian state space corporation Roscosmos said (2020).The launch was carried under a contract signed in 2015 by OneWeb, Roscosmos, and France's Arianespace. It was the third launch of OneWeb satellites, raising the number of the company's spacecraft in low Earth orbit to 74.

The first six OneWeb satellites were launched from French Guiana in February 2019, and have been joined by another batch of 34 satellites. OneWeb intends to deploy a total of more than 600 satellites in low Earth orbit, which are designed to provide consumers on the ground with low-latency, 24-hour, high-speed Internet directly through satellite communications.

• The government published its National Counter-Proliferation Strategy in March 2012.
• The strategy’s main aims are:
• to deny terrorists the materials and expertise to make and use WMD.
• to stop countries such as Iran and North Korea from obtaining WMD or advanced conventional weapons.
• to build up the International Atomic Energy Agency (IAEA), UN and other organizations and treaties that help us meet our goals through the international community and which help to protect global security and prosperity.
• Sanctions will not affect this policy.

More than 200 licenses to sell British weapons to Russia, including missile-launching equipment, are still in place despite David Cameron's claim in the Commons on that the government had imposed an absolute arms embargo against the country, according to a report by a cross-party group of MPs. The contract was cancelled by Theresa May.

In their first face-to-face meeting (2020) since Johnson's Conservative Party won a huge majority in a national elections, the U.K. prime minister told the Russian president that Britain is still furious over the attempted assassination of Sergei Skripal, a Russian former intelligence officer, in Salisbury, England in March 2018.

In a statement, No. 10 Downing Street said: “He was clear there had been no change in the U.K.'s position on Salisbury, which was a reckless use of chemical weapons and a brazen attempt to murder innocent people on U.K. soil. He said that such an attack must not be repeated.”

The United Kingdom and the United States are at odds over European plans to levy a 2 percent digital services tax on large technology companies, most of which are American. The United Kingdom believes firms such as Google and Facebook should pay taxes for benefits they receive in Britain. But the US has described such a tax as arbitrary and threatened the UK with a reciprocal levy on British car sales. The US has also warned that a trade deal with post-Brexit Britain might be harder to agree upon if a digital tax were levied.

On Huawei. The British government is expected to decide in coming weeks that it will allow the Chinese tech giant some involvement in generating the UK's 5G infrastructure. The British say that without Huawei's help, the introduction of new superfast broadband will be delayed and the UK economy damaged. The Americans warn the firm poses a security threat because of its close links to the Chinese state. Again, the Americans have made a threat, this time to withhold intelligence from their British allies.

Russia proceeds with the course of development of special relations with the biggest economies and leading political centers of continental Europe. Interaction with Germany and Italy is promoted within the quite predictable sphere of energy cooperation. As for France, the trade scope of Russian-French cooperation within absolute numbers falls behind from the Russian-German and Russian-Italian analogs, but it possesses a pretty significant peculiarity. Moscow and Paris strive to diversify their economic relations. The Russian subsidiaries of foreign banks earn very high profits. Fitch data shows that (Austrian) Raiffeisen’s return on equity is almost 25%. U.S. lender Citibank’s Russian division returns 34%. That compares to an average of 6% for banks in Europe. However, foreign banks account only for around 6% of the banking sector by assets. The largest are just four banks— Italy’s UniCredit, French bank Societe Generale’s subsidiary Rosbank, Austria’s Raiffeisen Bank, and the U.S. bank Citibank.

Of the big countries, Germany imports around 35 percent of its gas from Russia, while France imports 5-6% of gas from Russian gas. France imports less because they import LNG and generates most of their energy via nuclear plants.

• France is the second-largest investor in Russia, after the United States.
• The list of big contracts:

1. Renault-Nissan and “AvtoVAZ” (by 2014 the French group shall control 67% of the joint venture capital).
2. Agro-industrial group “Danone” intends to invest more than 500 million EUR into Russian market.
3. “Societe Generale’ from 2011 has controlled 82,4% of “Rosbank” shares, which has become as a result of this deal the biggest asset of French bank group outside France.
4. Russia bought 2 carriers “Mistral” and plans on joint construction of the 3rd and 4th ships of the kind at Russian shipyards shared with France. On 5 August 2015 it was announced that France would pay back Russia's partial payments and keep the two ships initially produced for Russia.
5. The Russian rocket “Soyuz” was launched from spaceport Kourou in French Guiana.
6. French companies “GDF Suez” and “EDF” cooperate on “North Stream” and “South Stream” which increased EU dependence on Russian oil and gas
7. The French energy company Total recently acquired a 10% stake in a $21 billion gas project in Russia’s Arctic, in addition to its existing 20% stake in a neighboring $28 billion gas project in the region, while Gazprom’s Nord Stream 2 offshore gas pipeline between Russia and Germany is receiving funding from French and German companies Engie, Uniper, and Wintershall, each of which is providing the project with €950 million ($1 billion) despite the project being threatened with U.S. sanctions.

• In 2011 France is not concerned about the security issues with Russia. France is due to deliver two high-tech Mistral warships to Russia. The first, christened the Vladivostok, has already undergone sea trials from the port of Saint-Nazaire. A second, called the Sevastopol, was due to be completed by 2014.
• France has insisted it was not fitting the ships with weapons technology. However, Moscow has said the deal includes the technology from France to produce the Mistral's command and control system itself.

• “The aggregate amount of Russian investment in the French economy stands at about USD 3 billion, while French investment in Russia is about USD 15 billion.
• The leader of the (French) Volga group, Mr. Timchenko, invested $4 billion to take a 12.8% stake in Novatek, Russia's largest independent oil and gas producer. Total (an oil and gas company) and Novatek together have a $27 billion project to develop a liquefied natural gas project in Yamal in the Russian Arctic. In 2019 Emmanuel Macron’s visited Skolkovo Innovation Hub, which enables French tech companies to show and sell their technological advances.

• A Europeanized Russian Soyuz rocket placed O3b Networks Ka-band broadband satellites into their unusual medium Earth orbit in 2013 in the second of three planned four-satellite launches for the company. The third launch is scheduled for early next year.
• Operating from Europe’s Guiana Space Center on the northeast coast of South America, the Soyuz-Fregat vehicle separated the satellites two at a time into an orbit with an altitude of some 7,836 kilometers.

• In 2020, President Macron said he wanted France and Russia cooperation to safeguard the Western–Iranian deal after being abandoned by the USA. The French Nuclear Force, part of the Armed Forces of France, is the third largest nuclear-weapons force in the world, following the nuclear triads of the Russian Federation and the United States.
• France deactivated all land-based nuclear missiles. On 27 January 1996, France conducted its last nuclear test (in the South Pacific) before signing the Comprehensive Nuclear-Test-Ban Treaty (CTBT) in September 1996. In March 2008, President Nicolas Sarkozy confirmed reports giving the actual size of France's nuclear arsenal and he announced that France will reduce its French Air Force-carried nuclear arsenal by 30%, leaving the Force de Frappe with 250 warheads. This force is not under control of the NATO.

French automotive manufacturer Renault slumped by 4.5% as the company warned about a sharp slowdown in emerging markets, including Russia. Russia is Renault's third largest market, based on sales.

Another notable difference between Britain and the Nordic countries on one hand, and France and Germany on the other, is where public sympathies lie with regard to the sanctions on Russia. Few people in either group of countries sympathize more with Moscow, but those in France and Germany are much less likely to sympathize with the new Ukrainian government. Most of all, people in France and Germany sympathize with “neither” government.

President Vladimir Putin accused the U.S. of seeking to blackmail France into scrapping a contract to sell Mistral warships to Russia by offering to cut a record $8.97 billion fine against BNP Paribas SA.

• Russia banned most fruit, vegetable, and meat imports from Poland.
• According to European Commission figures, the EU sold Russia 1.2 billion euros worth of fruit and 886 million euros worth of vegetables in 2011, accounting for 28 percent of the bloc's exports of fruit and 21.5 percent of its vegetables. For some EU countries, including Poland, the percentages are even higher.

Last year the country imported 60% of its gas from Russia. As of April 1st Poland could import significantly more gas from Germany, thanks to the expansion of a pumping station at Mallnow on the border. The gas in the Yamal pipeline, which brings Russian gas to Germany (via Belarus and Poland), can, for the first time, be pumped from west to east. Almost 100 percent of oil is imported from Russia. Poland is finished the construction of LPG transported by ships from the Middle east.

Before 2014 Poland had only $700 million worth of investments in Russia, with a total of some 350 billion of Western investments there. Since then there has been practically no new investments.

Poland is a member of NATO and hosts 4500 troops there. There are two Patriot anti-aircraft made in the United States and operated in Poland. Increasing the number of U.S. troops in Poland has been considered by the Polish government and President Trump. Poland is under contract to buy 5 F-35 fighter jets from the United States. This cooperation (building Camp Trump in Poland) and contracts are heavily dependent on the outcome of the U.S. elections.

Poland is conducting an unspoken policy of blocking investments from its historical adversary Russia. There are some 6000 German companies in Poland and 1800 Polish companies in Germany. The Polish foreign investment agency lists five from Russia.

Poland has no space cooperation with Russia today.

Poland is a non-nuclear state and signed all non-proliferation treaties.

Trade with Russia is about $10 billion, which is 5.4 % of the total trade. Trade with Germany is $49 billion and 22% of the total trade.

• The Russian government is accusing Poland of being paranoid about investing in Russian economy. Polish businesses are extremely suspicious of the Russian government use of tax authorities and the veterinary services as a trade tool to achieve political pressure in Polish government or extract bribes by the Russian officials.
• Poland has no Russian-speaking population, but nevertheless is concerned about its own security and is expecting Germany to take a leadership role in Europe to impose sanctions on Russia

The Polish government is very pro-American but has had too many disappointments and broken promises to rely on the US for security. The Polish government wants to increase military capability of the EU and NATO.

Bilateral trade last year totaled $46 billion before sanctions and was reduced to about $20 billion. Italy is the strongest advocate in the EU of removing the sanctions on Russia.

Italy imports 30% of its gas from Russia

• Russia’s investment in Italy over the past four years quadrupled to $500 million, while Italy’s investment in Russia grew to $1 billion.
• In the industrial and high-tech sectors: Alenia and Sukhoi collaborated on the production and marketing of the Super Jet 100. Pirelli, Danieli, Gruppo Marcegaglia, Ferrero, Indesit, Cremonini, Coeclerici, Marazzi and Barbaro have made substantial investments in Russia.
• FIAT joint venture with Sberbank assembles 120,000 Jeeps annually in St. Petersburg.
• ZIL and Case-NewHolland-Kamaz make farm machinery, Iveco/Oboron Service make the “Lynx” armored military vehicle in Russia.

Russia has purchased 60 armored personnel vehicles from Italy, according to SIPRI figures, along with new electronics and radio systems to upgrade military aircraft.

There are nearly 500 Italian firms operating in Russia. The key export sectors for Italian goods include machinery and mechanical equipment, textiles, leather products and apparel.

Italy plays a dominant role in the program of development and utilization of the International Space Station (ISS), gained not only thanks to its significant participation to the ESA European program for the accomplishment of Columbus Orbital facility (COF) and to its use (program to which Italy is involved in the measure of 19%) The lack of Russian supply vehicle will affect Italian participation in ISS programs.

There is no cooperation in this area

Unicredit Banca is ranked 8th in Russia in terms of assets, and is the top foreign bank there. Banca Intesa is among the top institutes for credit to small and midsized enterprises in Russia. Other Italian banks such as Monte dei Paschi di Siena, Banca Popolare Italiana and Unione Bancaria Italiana also maintain branch offices in Russia. The sanctions cut the flow of money between branches.

Governments (2001–2006 and 2008-2011) strengthened Italy's ties with Russia, due to his personal friendship with President Vladimir Putin. Cooperation extends also to the aviation sector, between Italy's Alenia and Russia's Sukhoi, who are jointly developing a new aircraft. Russians have always visited Italy in great numbers. Many Russian students come to Italy each year to study arts and music. Italy along with Germany are the two EU countries that lost most of the trade with Russia during the period 2014 – 2020.

Italy slipped back into recession, with growth contracting for a second straight quarter in the second quarter. The Italian government thinks that the sanctions will hit their economy harder than other nations in NATO.