Sanctions have done little to sway Putin

It may not be, as leaders in Washington and Brussels insist, the start of a new, cold war.

But the punitive sanctions against Russia announced by the European Union and United States last week bring to an end a 25-year-long quest to make Moscow a partner of the West.

How long the rupture will last and whether it intensifies will depend upon the response of Russia's president, Vladimir Putin — and above all on whether he steps back from escalating the bloody insurrection in eastern Ukraine that he has encouraged. He shows not the slightest sign of doing so. If anything, his belligerence toward the West and his preference for isolation are growing.

After months of disjointed action, America and Europe finally put together a tough and coordinated package of sanctions targeting state-owned banks and forbidding the export of technologies needed by Russia's oil and defense industries. On their own, the sanctions will not bring Russia to its knees. But they could do real damage to its already ailing economy.

The downing of a Malaysia Airlines jet last month, apparently by Russian-backed separatists in eastern Ukraine, hardened attitudes toward Putin. His refusal to accept any responsibility, and his stepping up of military support for the rebels after the tragedy, convinced European leaders, some of whom had opposed sanctions that might harm their own economies, that they had no choice but to punish his regime.

"It didn't have to be this way," Barack Obama said in announcing the new U.S. sanctions. "This is a choice that Russia and President Putin in particular made."

The sanctions against state-controlled banks present the biggest and most immediate threat to Russia's economy. According to Bloomberg, a news agency, VTB, Sberbank, Gazprombank and Vnesheconombank have around $15 billion in bonds denominated in dollars, euros and Swiss francs maturing in the next three years. The new sanctions make it harder for lenders such as these to raise equity and debt on Western capital markets. Without access to long-term external financing, their debts will be harder to pay.

The flow of international capital into Russia has already fallen. Dollar loans from foreign banks dropped to $7.9 billion in the first half of 2014, from $25 billion a year earlier; local firms have become more reliant on state-controlled Russian banks as a result. Although state banks can draw on domestic savings, and perhaps other sources of financing in places like China, less money will be available to finance investment. And if China does offer money, it would only be in exchange for preferential access to Russia's natural resources.

The sanctions do not target Russia's energy exports. But an embargo on Western technology will limit Russia's ability to tap new and hard-to-get-at fields in the Arctic and elsewhere, setting in motion a possible decline in hydrocarbon revenue in years to come.

Yet Russia's economic ties to the West have not been severed. The Americans have kept Sberbank, Russia's largest bank and the financial heart of its economy, off its sanctions list for the moment. The restrictions on technology exports to the oil sector left the gas industry conspicuously untouched, an obvious concession to Europe's dependence on Russian gas. Moreover, the E.U. has barred future, not existing, defense deals. France's $1.6 billion sale of Mistral-class warships can proceed as planned.

Putin counted on the West's dithering and short attention span to let him do as he pleased in Ukraine without much danger or cost. Diplomatic relations might suffer, but real pain would be absent — whatever the damage to Russia's economy or to Putin's image abroad, the prize of regaining Crimea and keeping Ukraine beholden to Moscow would be worth it.

It is now clear that the costs will be higher than he reckoned. But perhaps not high enough to make him relent. Dmitri Trenin of the Carnegie Moscow Centre, a think tank, argues that Putin is now fighting for political survival.

Copyright 2013 The Economist Newspaper Limited, London. All Rights Reserved. Reprinted with permission.