US postpones fresh sanctions on Russia, Kremlin retaliation options limited

The Trump administration postponed imposing yet another round of sanctions on Russia to the “near future” in the wake of this weekend's airstrikes on Syria.

The US ambassador to the United Nations Nikki Haley said on US talk shows that Washington would impose fresh sanctions on Sunday April 15 that would primarily target Russia’s defence sector and single out companies that were linked to chemical weapon production.

Russia’s markets opened flat on the next day as they waited for details of what exactly would be included. Russian stocks and bonds sold off heavily when the last sanctions were released on April 6. They targeted Kremlin insider Oleg Deripaska, but no new oligarch names were expected in this latest iteration.

Both sides seem to be keen to walk back a situation that has brought the world closer to a global military confrontation than at any time since the end of the Cold War. Going into the weekend Russian president Vladimir Putin threatened to shoot down any US missiles fired by the US at its ally Syria. US president Donald Trump responded that the missiles were on the way painting both the White House and the Kremlin into a corner. As it transpired in the actual attacks the US gave Russia priory warning as to the location of the strikes and the timing so there were no reported fatalities, making the whole exercise a show of strength and little more.

“We are considering additional sanctions on Russia and a decision will be made in the near future,” White House Press Secretary Sarah Huckabee Sanders said in a statement reports newswires.

Haley said on the “Face the Nation” show  day earlier that “you will see that Russian sanctions will be coming down. Secretary Steven Mnuchin will be announcing those on Monday, if he hasn’t already.”

Haley said the fresh round of penalties would “go directly to any sorts of companies that were dealing with equipment” related to Syrian President Bashar al-Assad and his chemical weapons.

Russia's Duma to respond in kind, but has few options

Russia's State Duma deputies have tabled a bill that outlines their proposed counter-sanctions in response to the last US sanctions, but the bill will not be read until next week.

Experts reviewing the proposals say that almost all the measures suggested would hurt Russian companies more than the US targets and also wreck local economies in many Russian regions were the local US affiliates are big employers if all the mooted measures are adopted.

The bill on retaliatory measures introduced by the chairmen of all the factions headed by State Duma Speaker Vyacheslav Volodin allows the government to introduce many bans, including barring the import of US-made drugs to Russia through to hiring foreigners by Russian companies.

Of US companies working in Russia, US planemaker Boeing and the major carmakers have been mentioned as possible targets in corporate-focused retaliatory measures. However, the bill is likely to be watered down and will probably be symbolic in substance if it is passed at all,  as Russia has little leverage over US business thanks to low volumes of trade and low levels of investment.

Economists have warned that all of these measures would probably hurt Russia as much, or more, than it will hurt the US. Russia plays a miniscule role in US exports and the revenue earned by its companies working in Russia, while significant, still has only a small role in these companies global income. The trade turnover between the US and Russia was $23.1bn in 2017 – Russian exports $10.6bn, imports $12.5bn making the US Russia's fourth largest trade partner – a tenth of Russia’s trade turnover with the European Union (EU) and a quarter of that with China. Russia's biggest imports from the US are cars, pharmaceuticals and medical equipment.

The pharmaceutical sector would be especially hard hit as replacing imported US drugs will be extremely difficult, if not impossible. The share of imported drugs on the Russian market in 2017 exceeded 70%, according to the DSM Group Vedomosti reported. Companies from the United States accounted for 28% of the market in money terms and 8% of public procurement, said the head of Quintiles IMS Russia, the Russian daily added.

Other products that have been suggested like tobacco and software would be impossible to implement. US makers of cigarettes and tobacco have all set up Russian production and a ban on using US software would be widely ignored and impossible to enforce, say experts.

Rare earth metals is the one place that Russia really could wound American interests as Russia is a major supplier of titanium to US planemaker Boeing.

But the Russian companies involved are not happy at the prospect of a ban as it would wreck their business. The world's largest titanium producer is the Urals-based VSMPO-Avisma, which says a ban would lose its market share in the US forever.

"Violation of cooperation ties, unfulfilled business obligations will last for a long time, if not forever, and rip out our company out of a dynamically developing titanium market. In addition, in the Urals region more than 20,000 employees will find themselves in a crisis situation," the company said in a statement, Vedomosti reported.

Russia could also restrict the exports of palladium, which is largely produced by Norilsk Nickel, that would destabilise the international market for the metal. Aluminium prices were rocked on international markets after Deripaska’s Rusal was sanctioned last week and a similar and more significant impact on palladium would follow a ban on exports to US markets. Norilsk is a major producer of PGM group metals (platinum group of metals), which are widely used in the car industry. However, Russian press reports that Zimbabwean and South African producers could cover the absence of Russia’s production of PGM metals.

Some deputies have suggested cancelling US intellectual property rights protection in Russia, so local companies can copy US products without charge. However, experts have criticised this idea saying all it would do is to encourage a flood of counterfeit goods from low-cost producers in Asia and elsewhere, which would hurt the consumer.

The only really affective punishment Russia can impose on the US is to hike the fly-over fees for US airlines flying from the US to Asia, most of which cross Russian airspace, which is US biggest international freight route accounting for half of its foreign air cargo. US airlines have already begun re-routing their planes to avoid Russian airspace on April 16, according to reports.

The share of air navigation fees in the cost of a freight carrier is 5% - 7%, Vedomosti reports. According to the Bureau of Transportation Statistics of the United States 35% of all international traffic flow of American airlines was made up of the United States - the Pacific region route in 2017. Aeroflot would be a big winner from this measures as the flyover fees are still paid to the national carrier instead of directly to the government.

Defence targeted, oligarchs maybe

The list Russian Duma deputies have drawn up remains a threat as the Kremlin waits to see what promised fresh US sanctions will contain. The new sanctions will specifically target Russia’s defence industry, according to comments made by Haley.

They are not expected to target more oligarchs at this stage, which would lead to more heavy selling of Russian stocks and bonds if anyone famous is included. The Sunday Times published a story claiming more Russian oligarchs will be included in the new list and mentioned oligarch Roman Abramovich by name.

Abramovich is close to Russian president Vladimir Putin and also a close friend of Oleg Deripaska, who was singled out in last week’s sanction list. Abramovich is a member of the Yeltsin-era “Family” fraction that virtually ran the country during Yeltsin’s last years and is credited with hand picking Putin for the job of prime minister and then president in 2000. Abramovich was known as the “Kremlin’s cashier” in the 90s and worked hand in glove with Yeltsin’s daughter Tatyana Yumasheva (nee Dyachenko) and her lover, now husband, and head of the presidential administration Vladimir Yumashev. Deripaska is married to Yumashev’s daughter.

Russian UN draft resolution fails 

Russia introduced a draft resolution at the end of an emergency UN Security Council meeting called by the Kremlin on April 15, but it was rejected by three permanent members of the group: the US, the UK and France.

"It was to be expected that no resolutions will be taken and that Americans and their allies will veto all projects," Head of the Center for Public and Media Relations at the Russian Institute for Strategic Studies Igor Pshenichnikov told TASS. "On the other hand, such sessions are very important, as Russia has a pulpit from which it can speak the truth and others have to listen to it, whether they want it or not," he added.

Russia’s draft resolution denounced the air strikes conducted by the US against Syria over the weekend and demanded an end to their “aggression” against the Middle East country.

The document failed to win the necessary nine votes. The draft resolution was backed by three countries: Russia, Bolivia and China. Notably of the four countries that abstained, Russian ally Kazakhstan stands out. Also while China supported Moscow, its statement was very neutral say experts. Moscow is not enjoying universal support in this conflict, but neither is the US. Notable from the list of countries that were absent from the bombing was Germany, although German Chancellor Angela Merkel offered verbal support saying the strikes were the “right thing to do.”

There no casualties among civilians and Syrian military servicemen from the US missiles strikes, according to preliminary data, Head of the Russian General Staff’s Main Operations Directorate Sergei Rudskoi told reporters at a press briefing in the Russian Defence Ministry at the weekend.

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