What Kind Of Sanctions Would Hurt Russia Most?

A look from inside Russia at the prospect of an Iran-style oil embargo, travel bans and other measures the West could apply to make Moscow pay for their policy in Ukraine.

In Moscow
In Moscow
Aleksander Sotin

MOSCOW — At the beginning of March, the idea of international sanctions against Russia seemed like mere speculation. But if Crimea decides to join Russia on March 16, threats of international isolation could become a reality.

“We are considering a whole series of steps — economic, diplomatic — that will isolate Russia and will have a negative impact on the Russian economy and its status,” U.S. President Barack Obama declared. A source close to Secretary of State John Kerry said that sanctions could begin in a matter of days.

The rhetoric from Western European leaders has been less harsh, but the level of interdependence between Russia and Western Europe is also much higher. Nevertheless, Britain's Foreign Secretary William Hague said that Russia would pay a high price if it did not reverse course on Crimea.

Russian diplomats seem to be convinced that it won’t come to sanctions. The Russian ambassador to the EU said that legally speaking, international sanctions can only be put into place by the United Nations Security Council, and that anything else would simply be considered actions taken by individual countries.

Among the “softer” measures that other countries could take are a boycott of the G8 meeting in Sochi and the permanent exclusion of Russia from the club of “developed countries.” The United States could also stop negotiations regarding free trade between the two countries (an agreement regarding the creation of a free trade zone between Russia and U.S. was signed at the end of 2013). Free trade would reduce burdens on business between the two countries, but now the whole agreement is in question.

Military cooperation has also been cut off. The United States and Canada have both announced that they will no longer cooperate with Russia. NATO has ended all military contacts with Russia, the alliance’s General Secretary announced.

But there are other sanctions that would hurt more. Charles Tennock, head of the Commission for International Affairs in the European Parliament, said that Turkey should close the Dardanelles Strait to Russian ships, like it did after the Russian-Georgian war of 2008. “Ankara should close the Turkish straits not only to Russian warships, but to all commercial vessels bound for Russia’s Black Sea ports,” he said.

Tennock says he doesn’t doubt Turkey’s support, because of its concern for the fate of the Crimean Tatar people, who trace historical links to Turkey.

The crisis in Ukraine has already caused a 5% increase in food prices in Russia over the past month. In addition to the danger that deliveries from Ukraine will be stopped, there are other risks. “If Turkey closes the Dardanelles and Russian food products can’t make it to the market, the situation will be like 2010, when Russia instituted an embargo on grain exports due to drought,” explained Andrei Kusnetsov, an analyst at Wild Bear Capital. “Food prices nearly doubled then. But I still don’t think that sanctions like that are coming.”

In addition, the “Magnistsky List” is expanding, to include a number of public and private figures in Ukraine and Russia who the United States says have threatened Ukraine’s territorial integrity. Tennock has also advocated the radical move of rescinding visas for all Russian government officials.

Financial noose

The possibility of U.S. economic sanctions against Russia are even more dangerous than travel bans. According to U.S. Senator Chris Murphy, the Senate is planning measures against Russian banks, which include freezing the assets of Russian government and private investors.

“The bank accounts and assets of Russian officials that are located outside of Russia could be targeted,” said Dmitri Malyishev, the head of international development and tax law at the KCK group. “The goal is to underline the legality of what is going on. It is most likely that there would be increased taxes or fees for Russian borrowers. A more extreme and unlikely possibility is that all payments that pass through American banks could be blocked if they have a Russian beneficiary.”

Pustam Vakhitov, a partner at Baker Tilly Tax Services, doesn’t expect the international reserves of the Russian Central Bank to be frozen. “In theory, everything is possible, and the reserves could be frozen. But that is such an extreme measure, the possibility of it happening are vanishingly small.”

A more pressing issue is the American Foreign Account Tax Compliance Act (FATCA), under which all banks in the world are supposed to provide the IRS with information about their American clients by March 31, 2015. The way this type of issue is dealt with is through an agreement between governments, but if that falls apart, each bank will have to transfer information directly to the IRS or face fines. “That would be a problem,” Vakhitov says. “If there’s no standard procedure, each bank will have to work directly with the IRS. Banks will face a dilemma: either break banking privacy rules or face fines from the IRS.”

The Iranian example

Politicians in search of a hard line have yet another option on the table: financial sanctions against Russia like those that Iran has faced. The heaviest tool against Iran is an embargo on imports of Iranian oil, and Tehran continues to face high inflation and unemployment, and feeble GDP. Only two years have passed since the EU instituted sanctions against Iran, and Iranian oil exports have already been cut nearly in half.

Is oil the solution? — Photo: Helge V. Keitel

And yes, Russia currently exports more oil than Iran. Before the EU sanctions, Iran was the seventh-largest oil exporting nation. Russia was the second, exporting more than 3.5 times as much oil as Iran did in the best of times. Russia is also the world’s largest natural gas exporter. Most of the exports go to the EU — 84% of Russian oil exports and 76% of its gas exports go to the EU. Russia accounts for up 34% of EU's oil imports and 32% of its gas markets. Europeans depend much more on Russian energy imports than it ever did on Iranian oil. It could refuse Iranian oil, but it can’t turn down Russian oil and gas.

President Vladimir Putin understands the situation. “The first people who should think about the consequences of sanctions are the people who are thinking about imposing them," he said during last week's press conference. "I know that in this interconnected world, we can hurt each other by imposing sanctions, but it will be mutual harm, and you also have to consider that.”

Nikita Filin, from Russian University for the Humanities, doubts the most extreme scenarios. “The possibility of an Iranian-style sanction is extremely low,” he said. The problem is not only the size of the Russian economy, Filin says, but that economic sanctions in Iran have not been successful, from a political point of view.

Other options

Sanctions are not the only way to hurt Russia. Europe can’t drop Russian oil and gas on a dime, but it can follow a long-term strategy to find other sources for energy.

Iran, which has been opening up under newly elected President Hassan Rouhani, could be an alternative to Russian energy exports. “Russia is becoming a less attractive partner for Europe, while Iran is becoming more attractive,” said the head of the East European Gas Analysis Mikhail Korchemkin.

Increasing U.S. gas exports to Europe could also make sanctions on Russia more feasible. Right now US gas exports to Europe are legally restricted, which Republicans in Congress would like to change. But even if that were to change, it would take time to build the infrastructure for gas imports.

Putin shedding tears of oil — Photo: Cea.

Another option is for OPEC to release oil reserves and make oil prices crash. No one knows what Saudi Arabia — who in practice would make the decision about flooding the oil market — is planning to do. However, the last time OPEC decided to flood the market in the 1980s, it started the USSR’s downward economic spiral. Saudi Arabia has the ability and the motivation to punish Russia, in large part because of Russia’s position on Syria.

Eye for eye

Russia’s already thinking about how it would respond to potential sanctions. Sergei Glazev, an advisor to Putin, has said that if sanctions against Russian government structures were announced, the Kremlin would have to announce that it would not pay back any of the loans to U.S. banks. Although an unnamed source at RIA Novosti contested the quote, it was widely reported in the Western press and could already affect the ability of Russian companies to get loans from Western banks.

Russian lawmakers have also announced that they are working on a law that would call for the confiscation of assets and bank accounts of European and American companies in the event of sanctions against Russia.

Recent reports on the investment climate in Russia have cited political risks as a reason not to invest in the country, and leaders in government and business have repeatedly said that improving Russia’s investment climate is a priority. Now those reports will have to add the risk of property confiscation and the completely unpredictable political situation to the already long list of risks of doing business in Russia. Under the current circumstances, Russia might as well forget about becoming more attractive for investors.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!

7 Ways The Pandemic May Change The Airline Industry For Good

Will flying be greener? More comfortable? Less frequent? As the world eyes a post-COVID reality, we look at ways the airline industry has been changing through a pandemic that has devastated air travel.

Ready for (a different kind of) takeoff?

Carl-Johan Karlsson

It's hard to overstate the damage the pandemic has had on the airline industry, with global revenues dropping by 40% in 2020 and dozens of airlines around the world filing for bankruptcy. One moment last year when the gravity became particularly apparent was when Asian carriers (in countries with low COVID-19 rates) began offering "flights to nowhere" — starting and ending at the same airport as a way to earn some cash from would-be travelers who missed the in-flight experience.

More than a year later today, experts believe that air traffic won't return to normal levels until 2024.

But beyond the financial woes, the unprecedented slowdown in air travel may bring some silver linings as key aspects of the industry are bound to change once back in full spin, with some longer-term effects on aviation already emerging. Here are some major transformations to expect in the coming years:

Cleaner aviation fuel

The U.S. administration of President Joe Biden and the airline industry recently agreed to the ambitious goal of replacing all jet fuel with sustainable alternatives by 2050. Already in a decade, the U.S. aims to produce three billion gallons of sustainable fuel — about one-tenth of current total use — from waste, plants and other organic matter.

While greening the world's road transport has long been at the top of the climate agenda, aviation is not even included under the Paris Agreement. But with air travel responsible for roughly 12% of all CO2 emissions from transport, and stricter international regulation on the horizon, the industry is increasingly seeking sustainable alternatives to petroleum-based fuel.

Fees imposed on the airline industry should be funneled into a climate fund.

In Germany, state broadcaster Deutsche Welle reports that the world's first factory producing CO2-neutral kerosene recently started operations in the town of Wertle, in Lower Saxony. The plant, for which Lufthansa is set to become the pilot customer, will produce CO2-neutral kerosene through a circular production cycle incorporating sustainable and green energy sources and raw materials. Energy is supplied through wind turbines from the surrounding area, while the fuel's main ingredients are water and waste-generated CO2 coming from a nearby biogas plant.

Farther north, Norwegian Air Shuttle has recently submitted a recommendation to the government that fees imposed on the airline industry should be funneled into a climate fund aimed at developing cleaner aviation fuel, according to Norwegian news site E24. The airline also suggested that the government significantly reduce the tax burden on the industry over a longer period to allow airlines to recover from the pandemic.

Black-and-white photo of an ariplane shot from below flying across the sky and leaving condensation trails

High-flying ambitions for the sector

Joel & Jasmin Førestbird

Hydrogen and electrification

Some airline manufacturers are betting on hydrogen, with research suggesting that the abundant resource has the potential to match the flight distances and payload of a current fossil-fuel aircraft. If derived from renewable resources like sun and wind power, hydrogen — with an energy-density almost three times that of gasoline or diesel — could work as a fully sustainable aviation fuel that emits only water.

One example comes out of California, where fuel-cell specialist HyPoint has entered a partnership with Pennsylvania-based Piasecki Aircraft Corporation to manufacture 650-kilowatt hydrogen fuel cell systems for aircrafts. According to HyPoint, the system — scheduled for commercial availability product by 2025 — will have four times the energy density of existing lithium-ion batteries and double the specific power of existing hydrogen fuel-cell systems.

Meanwhile, Rolls-Royce is looking to smash the speed record of electrical flights with a newly designed 23-foot-long model. Christened the Spirit of Innovation, the small plane took off for the first time earlier this month and successfully managed a 15-minute long test flight. However, the company has announced plans to fly the machine faster than 300 mph (480 km/h) before the year is out, and also to sell similar propulsion systems to companies developing electrical air taxis or small commuter planes.

New aircraft designs

Airlines are also upgrading aircraft design to become more eco-friendly. Air France just received its first upgrade of a single-aisle, medium-haul aircraft in 33 years. Fleet director Nicolas Bertrand told French daily Les Echos that the new A220 — that will replace the old A320 model — will reduce operating costs by 10%, fuel consumption and CO2 emissions by 20% and noise footprint by 34%.

International first class will be very nearly a thing of the past.

The pandemic has also ushered in a new era of consumer demand where privacy and personal space is put above luxury. The retirement of older aircraft caused by COVID-19 means that international first class — already in steady decline over the last decades — will be very nearly a thing of the past. Instead, airplane manufacturers around the world (including Delta, China Eastern, JetBlue, British Airways and Shanghai Airlines) are betting on a new generation of super-business minisuites where passengers have a privacy door. The idea, which was introduced by Qatar Airways in 2017, is to offer more personal space than in regular business class but without the lavishness of first class.

Aerial view of Rome's Fiumicino airport

Aerial view of Rome's Fiumicino airport

Hygiene rankings  

Rome's Fiumicino Airport has become the first in the world to earn "the COVID-19 5-Star Airport Rating" from Skytrax, an international airline and airport review and ranking site, Italian daily La Repubblica reports. Skytrax, which publishes a yearly annual ranking of the world's best airports and issues the World Airport Awards, this year created a second list to specifically call out airports with the best health and hygiene standards.

Smoother check-in

​The pandemic has also accelerated the shift towards contactless traveling, with more airports harnessing the power of biometrics — such as facial recognition or fever screening — to reduce touchpoints and human contact. Similar technology can also be used to more efficiently scan physical objects, such as explosive detection. Ultimately, passengers will be able to "check-in" and go through a security screening anywhere at the airports, removing queues and bottlenecks.

Data privacy issues

​However, as pointed out in Canadian publication The Lawyer's Daily, increased use of AI and biometrics also means increased privacy concerns. For example, health and hygiene measures like digital vaccine passports also mean that airports can collect data on who has been vaccinated and the type of vaccine used.

Photo of planes at Auckland airport, New Zealand

Auckland Airport, New Zealand

Douglas Bagg

The billion-dollar question: Will we fly less?

At the end of the day, even with all these (mostly positive) changes that we've seen take shape over the past 18 months, the industry faces major uncertainty about whether air travel will ever return to the pre-COVID levels. Not only are people wary about being in crowded and closed airplanes, but the worth of long-distance business travel in particular is being questioned as many have seen that meetings can function remotely, via Zoom and other online apps.

Trying to forecast the future, experts point to the years following the 9/11 terrorist attacks as at least a partial blueprint for what a recovery might look like in the years ahead. Twenty years ago, as passenger enthusiasm for flying waned amid security fears following the attacks, airlines were forced to cancel flights and put planes into storage.

40% of Swedes intend to travel less

According to McKinsey, leisure trips and visits to family and friends rebounded faster than business flights, which took four years to return to pre-crisis levels in the UK. This time too, business travel is expected to lag, with the consulting firm estimating only 80% recovery of pre-pandemic levels by 2024.

But the COVID-19 crisis also came at a time when passengers were already rethinking their travel habits due to climate concerns, while worldwide lockdowns have ushered in a new era of remote working. In Sweden, a survey by the country's largest research company shows that 40% of the population intend to travel less even after the pandemic ends. Similarly in the UK, nearly 60% of adults said during the spring they intended to fly less after being vaccinated against COVID-19 — with climate change cited as a top reason for people wanting to reduce their number of flights, according to research by the University of Bristol.

At the same time, major companies are increasingly forced to face the music of the environmental movement, with several corporations rolling out climate targets over the last few years. Today, five of the 10 biggest buyers of corporate air travel in the US are technology companies: Amazon, IBM, Google, Apple and Microsoft, according to Taipei Times, all of which have set individual targets for environmental stewardship. As such, the era of flying across the Atlantic for a two-hour executive meeting is likely in its dying days.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!