When introducing sanctions, it is important not to throw the baby out with the bath water.

308fbb9Over the last week and a half, the crisis in Crimea, Ukraine has riveted the world’s attention and has caused US, EU, Canada and Russia to cross diplomatic swords over the issue. The situation is akin to that of a propane gas being allowed to fill an enclosed room and several sides involved playing with lighters nearby, but hoping the sparks generated as the result will not  trigger a massive explosion.

Although there exists an absolutely clear diplomatic solution, which I think will be achieved in this situation barring any potential military flare up triggered by some sort of a local  incident that spins out of control, the US has taken an approach of the stick over the carrot to try and resolve the crisis, or to at least to get the parties into a meaningful diplomatic discussion.

Sanctions are a viable political tool, which have proven effective in multiple situations (think Iran, Cuba, Lybia, the Soviet Union). Mild sanctions, like the ones announced by President Obama on Thursday, are designed to try and force parties to the negotiations table and presumably have the specific parties against whom the actions are introduced, lobby their government for reprieve and certain acquiescence during the negotiation process. Yet even mild sanctions will trigger what Russia calls an asymmetrical response that will likely sting the imposing side. The response and the low effect of the original sanctions are likely to trigger imposition of even stronger economic and political sanction by the US and Canada(note EU has thus far carefully abstained from getting involved in this). The problem with using strong sanctions against Russia today, is that over the last two and half decades since the fall of the Soviet Union, there has been a tremendous fusion of economic, business, political, personal and cultural interests between Russia and US and certainly between  EU, Canada and Russia.  Thus almost inevitably, introduction of any meaningful sanctions will result in unintended collateral damage and will inflict meaningful pain on the businesses, individuals and cultural institutions of the country imposing the sanctions.

Lets look at some examples of collateral effects on the US economy :

  • Asymmetrical response being considered by Russia will allow the Russian government to randomly seize US assets of companies and individuals operating in Russia. Not only this threatens real economic well-being of multiple US companies and expatriates there, but has potential to cripple direct foreign investment for years to come. Ditto for US real estate sector,franchising sector, financial markets and factories, as well as  business purchased by Russian individuals in the US. This will result in the loss of business and tax revenues. Billions of dollars in lost economic effect are at stake.
  • US exporters, manufacturers, freight forwards and shippers are at risk of losing hundreds of million of dollars in revenue and thousands of American jobs will be affected if trade restrictions are imposed by the State Department, or by the Russian authorities.
  • US hospitality industry and retail sector will be effected by the visa restrictions and will lose millions in revenues from the visiting and free spending Russian tourists.
  • Educational institutions, sports and entertainment arenas will be affected by the patriotic backlash, lost revenue and lost opportunity for cross-cultural diplomacy, should sanctions be introduced. Even though in 1980, when US boycotted the Moscow Olympics, it was much simpler to contain the collateral damage due to an isolated nature of the Soviet regime, the effect on athletes, as well as economic and political fallout still were substantial. Today it would be an order of magnitude worse.
  • Politically, critical issues where US and Russia cooperate – counterterrorism, containment of Iran nuclear proliferation, removal of chemical weapons in Syria, will be affected to the detriment of both sides and our allies.

Strong sanctions definitely have a place in resolving geopolitical crises, but they should be the option of the next to last resort, imposed before military action is invoked, and at no other time. A credible diplomatic solution for the Crimean crisis is available and needs to be pursued in earnest, otherwise introducing sanctions into highly intertwined relationship between Russia and its Western counterparts risks throwing out the baby with the bath water and cause more problems than it will solve.

Advertisements

About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

2 Responses to When introducing sanctions, it is important not to throw the baby out with the bath water.

  1. John Cowherd says:

    Alexander,

    I thought this was a strong post about an important topic. As you mention, the sanctions are enforced more on the U.S. businesses to have a secondary effect on those people identified on the SDN lists.

    These OFAC issues are a big deal for people involved in real estate settlements in the U.S.. On my blog yesterday I discuss some of these issues in my blog post about this same executive order: http://bit.ly/1fkWbya

    John

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Site Title

“Love recognizes no barriers. It jumps hurdles, leaps fences, penetrates walls to arrive at its destination full of hope.” — Maya Angelou

Museum of International Trade & Merchant Banking (MoMBIT)

chronicling the importance of international trade and merchant banking in the global development

Fluent In Foreign Business

Helping To Grow Your Business Abroad

Emerging Market Insights

How to make a killing in Emerging Markets without losing your shirt?

Ideas That Work @ GIDASPOV.COM

Strategy | Creativity | Innovation | Fundraising | Marketing

Nu Leadership Revolution Blog

“Helping Emerging Leaders Gain the Competitive Advantage in the Future"

Mike Z's Blog

Exploring the causes of cancer throughout the world

Bucket List Publications

Indulge- Travel, Adventure, & New Experiences

FranchisEssentials

Sharing Information, Insight and Perspective about Franchising, Small Business and Entrepreneurship

bizrisk.wordpress.com/

We Help Insurance Agencies Stand Out

The WordPress.com Blog

The latest news on WordPress.com and the WordPress community.

%d bloggers like this: