Why Obama's Sanctions Against Russia Won't Work

President Obama has twice announced sanctions against Russia over the past week. Here's why they won't work.

Mar 23, 2014 at 2:58PM


Despite the hooting and hollering in Washington, D.C., it's unlikely that many people there believe the recently imposed sanctions on Russia will have any impact whatsoever on the Vladimir Putin's decision to annex the Crimean Peninsula -- or, for that matter, possibly even parts of Eastern Ukraine if the Russian leader deems it fit to do so.

This isn't to say that sanctions aren't an effective tool of international diplomacy. As last year's capitulation by Iran demonstrated, nothing could be further from the truth. Since the Shah was removed from power in the late 1970s, Western influence has been persona non grata in the Middle Eastern country. This was particularly the case with respect to its budding nuclear program.

But this changed once the United States spearheaded a regimen of crippling sanctions. Aside from the impact on Iran's bread-and-butter oil industry, the country's economy was driven asunder by uncontrollable inflation, which rendered its currency increasingly worthless both at home and in foreign exchange markets.

As we're beginning to find out, however, this same model can't be brought to bear on Russia. The following slideshow will give you some idea of why, with more details afterward.

Unlike Iran, where there was strong unanimity for sanctions among Western powers, such a quorum isn't possible against Russia. This follows from the simple fact that the massive Eurasian country supplies a third of Europe's energy via natural gas pipelines that pass, not coincidentally, through Ukraine.

On top of this, multiple U.S. corporations do business with Russia. Topping the list is ExxonMobil (NYSE:XOM). In 2011, the energy giant entered into a $500 billion joint venture with Rosneft, an integrated oil company owned by the Russian government. The partnership's purpose is to drill for oil deep in the Arctic Ocean. As a recent Bloomberg Businessweek headline put it: "Post Crimea, Exxon's Partnership With Rosneft Feels Weird."

And Exxon isn't alone. Citigroup's (NYSE:C) latest annual report disclosed $10.3 billion worth of assets that are domiciled in or otherwise tied to Russia. Indeed, $1.7 billion of these are loans to the government itself and another $6.5 billion are accounted for as loans to institutional and wealthy clients -- given how Russia works, it's probably safe to assume that this entails significant government overlap.

On top of this, as my colleague John Reeves has pointed out, both Boeing (NYSE:BA) and General Electric (NYSE:GE) are similarly situated. "Both companies have considerable investments there and are worried that Russian retribution in response to U.S. sanctions could hurt their businesses," John noted.

With this in mind, the United States is left with few sufficiently coercive tools in its diplomatic tool chest. This is why the sanctions that have been imposed thus far can hardly be considered anything other than symbolic. On Monday, for example, President Obama announced sanctions against seven Russian officials. The list was expanded on Thursday to 23 members of the government.

The net result for investors is that there's less reason to fear for their portfolios than may have at first appeared to be the case. Aside from the fact that Russia's economy won't be hobbled by sanctions anytime soon, it's hard to imagine a scenario under which the U.S. government would want to jeopardize our leading companies' interests there.

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