Sanctions Fight Inspires Russia to Hurt Russians

(Bloomberg View) -- The U.S. and Russia have put off decisions on economic sanctions against each other, but the logic of their downward-spiraling relationship suggests that further restrictions are inevitable. It's difficult to predict where the U.S. will land on the issue, and who might end up suffering the consequences. The Kremlin's response is all but certain: It will intentionally target Russians more than Americans.

Whoever came up with the idea of making it impossible for UC Rusal, the aluminum company of Russian billionaire Oleg Deripaska, to operate in the U.S. probably didn't consider its unintended effects. For example: What would it do to the global aluminum industry's supply chain? Or Australian-British Rio Tinto, which used to sell raw materials to Rusal? Or the workers at the Rusal alumina refinery near Limerick in Ireland? That's just collateral damage.

On the other hand, potential Russian countersanctions, described in a bill sponsored by most of the Russian legislators from the speaker on down, include measures that can hurt millions of its own people. The legislators knowingly disregard it.

The bill -- which requires a presidential order to take effect -- is designed to "hit Americans in the solar plexus," as one of the numerous sponsors, Mikhail Yemelyanov, put it. The measures include:

  • Bans on the import of food, pharmaceuticals, alcohol and tobacco.
  • The cessation of business with any entities more than 25 percent owned by American individuals and companies in the nuclear and aerospace industries.
  • A ban on working with U.S.-based law, audit and consulting firms for government-linked Russian entities.
  • The annulment of trademark protection for U.S.-based companies. 
  • Higher flyover fees for U.S. airlines crossing Russian airspace.
  • Restrictions on the hiring of U.S. professionals and executives by Russian companies.

All these measures, according to the bill, can be taken against other "unfriendly" nations, too.

The food and tobacco import bans wouldn't be particularly painful. In the first nine months of 2017, Russia imported slightly more than $9 billion worth of U.S. goods, and less than 4 percent of that was food and alcohol. Russia can easily do without it, though some drinkers will miss their bourbon and Napa Valley wines. Though U.S.-based Philip Morris International is the leader of the Russian tobacco market, Russia only imported $57 million worth of raw tobacco from the U.S. in the first nine months of last year. The U.S. is a much smaller source of that import for Russia than, say, Brazil, and cigarette producers will easily source more of their raw materials from Africa, Asia and Latin America.

The same can't be said of U.S. pharmaceuticals. In 2017, U.S. companies accounted for 13 percent of Russian medicine imports. The countersanctions bill says restrictions can only be imposed on pharmaceuticals that can't be replaced with local products and imports from friendly countries -- a task greatly complicated by the high quality of U.S. medicines. But if authorities insisted on following through, slightly more than half of the imports -- some 45 billion rubles' ($731 million) worth -- would be lost.

That's about five days of revenue for Pfizer. But it's a major problem for Russian patients. Sometimes, equivalents aren't produced in sufficient quantities by non-U.S. companies; that's particularly the case with children's forms of certain medicines. In other cases, the quality gap may make a difference to the effectiveness of the treatment.

Asked how a Russian patient should react to a potential pharmaceutical import ban, Pyotr Tolstoy, deputy speaker of the parliament, offered a joke: "Just spit out those pills and boil up some oak bark."

The possibility of a ban on aerospace cooperation crashed the share price of VSMPO-Avisma, the Russian company that supplies titanium alloys to Boeing. Though the delay of the countersanctions bill till May 15 has led to a minor recovery, the stock is down 5 percent as compared with the beginning of April. North America is responsible for more than 30 percent of the firm's sales. But if aerospace business with the U.S. ceases, the consequences may be worse than a major drop in Avisma sales and a blow to its 20,000-strong workforce. Boeing would struggle to source titanium parts elsewhere, and the U.S. government might retaliate with a ban on the export of parts for the substantial fleet of Boeings used by Russian airlines.

Similarly, a ban on the export of Russian rocket engines, which the U.S. still buys, would hurt Russians most of all. The U.S. aerospace industry will find replacements (the biggest U.S. launch company, SpaceX, doesn't use Russian engines, anyway), but Russia will lose the sales.

The ban on U.S. professionals and managers -- in 2016, the latest year for which data are available, 1,000 Americans held Russian work permits -- also amounts to gross self-harm. So do the restrictions on U.S. audit and consulting services. The Americans only work in Russia because their companies cannot find locals to fill the demanding positions. Nor do state-owned Russian firms use international auditors, consultants, lawyers and rating agencies because they love their high fees: It's necessary to be able to borrow and buy assets overseas, among other things.

Sanctions are always, to some extent, a boomerang: A nation cannot hurt its trade partners without hurting itself. But the weaker side always sustains more damage. And there's no question that, pitted against the U.S., Russia is the economically weaker party. With the countersanctions bill, it's not just attempting to shoot itself in the foot; it's putting a bullet in every toe. One can only hope President Vladimir Putin will be as reluctant to implement the bill as his counterpart Donald Trump is to impose the sanctions demanded last year by Congress.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

To contact the author of this story: Leonid Bershidsky at lbershidsky@bloomberg.net.

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