Thursday, June 26, 2014

Why Sanctions Against Russia Won't Work

In general, economic sanctions against one nation by another nation (or, in this case, a group of nations) are a political tool that is used to weaken the target nation and/or its leadership.  The motives behind the sanctions are to punish, deter and eventually rehabilitate the nation that is the subject of the sanctions.  This is viewed as a non-military way to put an end to what is viewed as unacceptable behaviour.  By imposing the sanctions, it is hoped that the actions taken will do one or more of the following:

1.) deprive the target nation of access to foreign markets and foreign currencies.

2.) by depriving the target nation of certain goods and services, the target nation will have to pay more for substitute goods and services.

3.) by imposing financial sanctions (i.e. restricting aid, loans etcetera), the target nation may find that the interest rates on borrowing rise or that borrowed money is harder to access.

Trade sanctions generally have a strong negative impact on the target country's population, however, they may benefit the elites in the target nation who control access to goods through the black market.  Financial sanctions are more likely to negatively impact the target nation's political leadership.  Through all three of these mechanisms, it is hoped that the citizens of the target nation will rise up and, either peacefully through the ballot or violently through the use of demonstrations, overthrow their leadership, putting an end to the unacceptable behaviour.

The EU, Canada and the United States have been busily imposing what would be considered a rather toothless set of sanctions against certain individuals and enterprises in Russia in response to what they deem unacceptable behaviour by Russia in Ukraine.

I was recently on a trip to Russia.  While there, I noticed the following:

You'll notice that other than the Cyrillic lettering on the signs, the logos are quite recognizable to most of us that live in an advanced economy where there is a Starbucks or McDonalds on what seems to be every other street corner.

While in Russia, I also noticed streets full of vehicles manufactured by the major car manufacturing companies of Japan, the United States, Korea, the United Kingdom and Germany.  In fact, the streets of Moscow and St. Petersburg are positively overflowing with foreign-made/foreign-sourced vehicles.  Gone are the days of the Skoda and the Lada.

Let's go back to the American fast food/coffee house industry, both of which are strongly represented in urban Russia, for a moment.  From Open Secrets, here is a graph showing how much McDonald's Corp. PAC spent on each election cycle since 1990:

In the 2014 cycle, so far, McDonald's Corp. PAC has spent $635,468.  In the 2012 cycle, McDonald's Corp. PAC spent $777,652, 59 percent of which went to Republican candidates.

Here's how much McDonald's Corp. has spent on lobbying since 1998:

In the full year 2013, McDonald's Corp. spent $2.27 million on lobbying, their highest amount ever.

Now, let's look at how much Starbucks spent on each election cycle since 1994 noting that they do not have a PAC:

In the 2012 cycle, Starbucks contributed a total of $164,421, mainly to the Democrats.

Here's how much Starbuck's spent on lobbying since 2004:

For the full year 2013, Starbucks spent 2.19 million on lobbying.

Lastly, and because you probably have a good sense of where this is heading, here is how much Burger King Corporation PAC spent on each election cycle since 2002:

In the 2012 election cycle, Burger King Corporation PAC spent a rather paltry $47,549, most of which went to Republican candidates.

Here's how much Burger King spent on lobbying since 1998:

It would appear that Burger King thinks that it gets more political "bang for its buck" by lobbying rather than by directly assisting candidates during an election cycle.

In total, the food and beverage industry spent $30.35 million on lobbying in 2013, down from a record $57.716 million in 2009.  In 2013, McDonald's was the third highest spender on lobbying  after Coca-Cola and Pepsico (both of which are also in Russia) with Starbucks Corp. coming in fifth place.

According to McDonald's full year 2013 results, their fourth quarter 2013 sales in the United States declined by 1.4 percent and sales in the Pacific/Asia/Middle East Region dropped by 2.4 percent on a quarter-over-quarter basis.  On the other hand, sales in Europe rose by 1 percent for the fourth quarter, largely thanks to increased sales strength in the United Kingdom, France and Russia.  These three countries accounted for 67 percent of the company's European revenues and the company notes that its operations in Russia are in an expansion mode.  Starbucks' 2013 Annual Report notes that they have 65 stores in Russia; while this is a tiny fraction of their total of 1116 stores in Europe and the Middle East, Starbucks is planning to expand into the southern part of Russia.

Now, let's put all of this together.  Given that American companies are firmly entrenched in the post-Communist pro-profit Russia and that they are firmly entrenched in the American political system through both political contributions and lobbying, surely, they are using some of their political clout to prevent the Obama Administration from effectively imposing any sanctions against Russia that may interfere with their ongoing business plans and profits?  With the intertwining nature of the global economy today, one can't help but shoot oneself in the foot when imposing tough and meaningful economic sanctions on another nation.  While the sanctions against Russia, at some point, may impact the Russian man/woman on the street, those who are at the top of the oligarchy food chain are still driving (or being driven) around the streets of Moscow in their Bentleys, Range Rovers and Ferraris and not really caring about the impact of sanctions.


  1. Methinks thou dost protest too much you old Bolshie.

  2. I agree, I saw the same thing when I was in Russia. Putin holds all the cards and control of natural gas flowing to Europe trumps all. Allowing events to deteriorate into a major war or possibly into what some see as World War III is becoming a reality.

    As insane as it appears this could become the final outcome. The location of this as a military confrontation is right in Putin's backyard and this is a strong advantage for Russia. It is silly to think Putin and Russia will back down. This means poking the bear is not a smart move. More on this subject in the article below.