The risk associated with sanctions on Russia

First the USA imposed sanctions on Russia for its actions in Ukraine and now Europe is on the verge of agreeing a package of sanctions to match. I am no fan of Vladimir Putin but the more I think about the probable effects of sanctions against Russia’s energy, banking, defense and technology sectors the more I see problems ahead.

This article is not about the rights or wrongs of sanctions or who is guilty of what in the current conflict in Ukraine. This article is simply about looking ahead at potential consequences.

I want to start by considering the frame of mind of Vladimir Putin. This is a man who has been in power for a long time now, over time he has become increasingly isolated in the sense of having little direct contact with the Russian people, but also with the majority of politicians in Russia, he avoids going to the Duma or congress as much as possible. Instead his main contact is through a small court of those he feels he can trust. The members of this court depend on keeping the status quo in Russia as their fortunes depend on it as much as Putin’s. Finally, Putin is also very close to Patriarch Kirill of the Orthodox church who is responsible to singing the praise of Putin from the pulpit to the common Russian people and keeping their support.

It is quite interesting when you watch Putin give interviews or when he is seen in public, to study his body language, not only this but also his micro expressions. These are facial expressions that last only a small fraction of a second and we have no control over them. I make a habit of watching politicians on TV with the sound off, it is more interesting to study their body language and facial expressions. Watching Putin, it has become clear over time that while he likes to give the impression of being the the ‘big man’ there comes across a real sense that he is on his own and he feels it, not only this but he is not always secure in himself. He compensates for this by putting on the macho act. Deep down he comes across as an injured and actually very sensitive person who tries to hide this about himself and so compensates by being aloof and hard. In Russian culture, leaders must always be strong and never show any sign of human weakness. However, it takes a lot of mental and emotional energy to keep the facade in place, particularly when there is a lot of external pressure. It can lead a fundamentally insecure person to become more erratic over time and possibly snap given enough pressure.

I will come back to Vladimir Putin’s state of mind in a moment. Now it is time to look at what the direct effect of sanctions could be in the next weeks and months. Russia is financially quite fragile, huge amounts of money are being taken out of the Russian economy and placed in other countries for safe keeping. I’m not talking about dirty money but businesses that don’t trust the Russian economy. This is creating liquidity problems and at the moment the price of oil is not high enough for the Russian central bank to be able to top up its cash reserves. Russia’s main banks are also facing their own liquidity problems. Then there is the fact that many companies have to refinance their debt over the short and medium term, to the tune of some $200billion if memory serves me correctly. Add to this the fine of $50 Billion that Russia has been ordered to pay by the Hague Court for its actions over the Yukos energy company and you begin to get an idea of how potentially unstable Russia really is. Sanctions will add a lot of pressure to this situation. While the intention is for sanctions to modify Putin’s behaviour in Ukraine, there is a very real risk that they will lead to a collapse of the entire Russian economy and all the related instability which would accompany the collapse.

What keeps playing through my mind is what Putin might do if he is really pushed into a corner. He isn’t the sort of person to back down even if he knows he is wrong, that would be showing weakness, as I said before it is likely that as the pressure increases he will become more erratic and possibly more dangerous. Imagine a wounded bear that has been cornered, this is the situation we are potentially looking at.

When one man has absolute power and he only allows a small group of those he trusts to be close to him, such a person will react very aggressively if he feels his power is being threatened. Sanctions, for good or bad, could have many unintended consequences, not only for Russia but also the wider international community.