As Russia President Vladimir Putin consolidates his military hold on the Crimean Peninsula, President Obama signed an executive order suspending certain Russian visas and allowing the Treasury Department to impose financial sanctions on individuals and entities for “misappropriating state assets of Ukraine.” Both Houses of Congress are also drafting financial, trade and other sanctions against Russia. This follows the speech by U.S. Secretary of State John Kerry March 2 stating that the Group of Eight (G8) and a number of countries are “prepared to go to the hilt to isolate Russia.” But given that retaliation from the Russians would cause more pain to American businesses and might freeze Europeans to death, the Russians know U.S. sanction threats are a joke. 

Only 2% Russian exports went to the U.S. in 2013, including $19.3 billion in petroleum and $1 billion in nuclear power plant fuel.  Despite Russia’s protectionist policies against imports that would compete with local industries, the U.S. enjoys a substantial trade surplus with Russia.  About 4.9% of Russian imports come from the U.S., including civilian aircraft, autos, chemicals and meat and other agricultural products.  Russia is less than 1% of U.S. export volume and the U.S. is less than 4% of Russian export volume.Everything in the bilateral trade relationship can be sourced from other nations. 

Russia does not leave much of its wealth in American hands, because Russian banks and financial institutions have relatively little exposure to the U.S. banks. At the end of 2013, Russia had $750 billion in deposits in Russian banks and only $20.2 billion deposited in in U.S. banks.U.S. investors do hold $56 billion of Russian stocks (6% of $870 billion total market capitalization), but there already was substantial selling of these shares since February 28th, when the Russian market fell by 11% in a single day.  The U.S. government could force American mutual fund and individual investors to immediately divest of Russian stocks, but this would cause big losses for Americans forced into distress selling.  Any market drop would be temporary since most private and state-owned Russian companies listing on foreign stock exchanges tend to register on the London Exchange or the Frankfurt Exchange.

The Russian ruble currency has slumped during the Ukrainian crisis, but the U.S. Federal Reserve does not keep rubles as reserves they could dump.  The CIA could solicit private Wall Street firms to drive the currency down, but coordinated action would violate the U.S. Securities Exchange Act of 1934 and set a horrible precedent for insider trading.  The Russian Central Bank has been spending $11 billion a day to support the ruble, but they have very deep pockets with $658 billion in foreign currency reserves.

After 85 years of protectionist policies, Russia had begun signing joint ventures with foreign firms.  According to Stratfor Intelligence report, the UK’s BP now holds a 20% stake in Russian state-owned Rosneft and the French company Total has a 14% interest in Novatek, the largest independent gas producer in Russia.

U.S-based Exxon Mobile signed billions of dollars of deals in the last two years, including a $2 billion joint venture with Rosneft in Black Sea and a $15 billion liquefied natural gas facility at the Siberian port of Vladivostok. Rosneft also owns with Exxon Mobile 30% of a field in West Texas, 20 exploration concessions in the Gulf of Mexico and a 30% stake in the West Canada Basin. The projects are designed to demonstrate to Russia the advantages of using American technology to explore and develop unconventional shale and tar sands resources. 

Banning U.S. firms from joint ventures would cause contractual defaults and tie up the American properties in litigation for many years.  Russia would probably nationalize foreign assets and  U.S. exporters of drilling equipment and oil services would scream at Congress for destroying jobs in America. Furthermore, Europeans who rely on Russian energy for 30% of their needs, run the risk of Russia cutting off supply.

Sanctions against Russia would also sting Boeing, which invested $7 billion in Russia over the last decade and has plans to invest another $18 billion over the next 7 years to gain a steady supply of titanium as a key to Boeing's future competitiveness.  Russia’s state owned commercial airlines currently have 100 planes from Boeing and the company was expecting significant follow-on orders. 

The Duma, Russia’s legislature,  is already drafting laws that would give President Putin the power to retaliate against enactment of economic sanction by confiscating property, assets, and accounts of U.S. companies. Russia could also shut off natural gas flow to Europe, but this action would have to be short lived since their economy relies almost exclusively on foreign currency from energy sales.  The ultimate revenge by Russia would be to withdrawing from the Intermediate-Range Nuclear Forces Treaty, which limits the maximum range of U.S. and Russian missiles, or the Strategic Arms Reduction Treaty, which reduced the total number of nuclear weapons in each nation’s arsenal. But such action would spark a wildly expensive arms race with America. 

Vladimir Putin and the Russians have managed to humiliate President Obama and demonstrate to their former members of the Soviet Union that the U.S. and Europe lack the military capability and the stamina to challenge the new Russia. I believe that the Putin will seek a settlement to the crisis from the position of strength he now holds.  The Russians know U.S. economic sanction threats are a joke.    

The author welcomes feedback @ chriss@chrissstreetandcompany.com
Chriss Street is teaching microeconomic at University of California, Irvine this spring from March 31 – June 8, 2014.  Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll!