The US And Europe May Have Just Sent A Ton Of Their Russian Business To China

China russia vladimir putin xi jingpingREUTERS/Paulo WhitakerRussia’s President Vladimir Putin (L) shakes hands with China’s President Xi Jinping

On Tuesday, President Obama announced additional, “major” sanctions against Russia due to the country’s continued involvement with Ukraine and their support of pro-Russian separatist groups.

The sanctions target Russia’s energy, arms, and finance sectors.

This is on top of existing sanctions against a series of large banks and energy firms including Rosneft, the world’s largest oil company, and Gazprombank, Russia’s largest private bank.

Sanctions are intended to hurt the economy of the targeted country, with the hope that businesses and workers pressure policymakers to alter their behaviour in order to restore the economic status quo.

However, sanctions often come with unintended consequences.

“We see a significant risk of a more fundamental shift in Russian economic policy, away from the market and global institutions in response to more serious sanctions connected to the situation in Ukraine and toward a greater focus on developing domestic markets and links with non-Western economies, particularly China,” said Morgan Stanley analysts Jacob Nell and Alina Slyusarchuk.

Nell and Slyusarchuk note that the recent decision by the Hague, which is calling Russia to award the shareholders of defunct oil company Yukos $US50 billion, only adds to the geopolitical rifts.

“The Yukos award could well strengthen Russian sentiment to further isolate itself from the West,” they said

Sanctions have a long history of not working. A study by Gary Hufbauer, Jeffrey Schott, and Kimberly Ann Elliot (HSE) found that only 34% of sanctions that they reviewed between 1914 and 1990 were effective.

Additionally, back in March, Morgan Stanley’s Russia economics and strategy team wrote that, “Typically, sanctions have been applied against much smaller countries, such as Iran, Iraq, Libya and North Korea, with significantly fewer resources” than Russia, which is a “large country, with extensive resources”.

Will it be different this time?

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