THE BLOG
09/28/2014 01:40 pm ET Updated Nov 28, 2014

The Flawed Logic of Russian Sanctions (and Why They Might Be Useful Anyway)

Western sanctions are harming the Russian economy, but that doesn't mean they will achieve anything the West wants in Ukraine. The Minsk ceasefire agreement benefits Russia much more than Ukraine, forcing Kiev to make political concessions while giving Moscow free rein on Ukraine's eastern borders and in Crimea. Russia has no incentive to break the ceasefire, with or without sanctions.

Meanwhile no one has said what Russia has to do to lift the sanctions. President Barack Obama last week urged Russia to take "the path of diplomacy and peace." But we don't know exactly where that path leads, or how anyone will determine whether Russia is on it.

We also don't know what mechanism is supposed to make Russia change its path. The most explicit statement about this was made by U.S. Treasury Secretary Jack Lew at UCLA on September 17. He said, "The goal is to change the way Russian leaders are making their decisions." Well, Russian leaders are making their decisions based on what President Vladimir Putin tells them to do. So the goal appears to be to drive a wedge between Putin and his closest personal supporters (the so-called "cronies"), by demonstrating that Putin can no longer offer them financial benefits for their cooperation.

But let's think through what this means. A number of Putin's friends would need to join together to convince Putin that if he doesn't change paths, they will withdraw their support. Unfortunately cooperation between individuals in any situation has to overcome what social scientist Mancur Olson called "the collective action problem." It is much easier not to stick your neck out by being the first to suggest that change is needed, instead sitting back and waiting for someone else to take the lead. Meanwhile, side bargains can pick off key people who might otherwise want change, even if the group as a whole continues to suffer. For example, Putin has recently transferred many state-owned enterprise accounts to the sanctioned Bank Rossiya, to substitute for Western accounts the bank has lost. Bank Rossiya no longer has any incentive to push for change.

People in Putin's group would have to accept enormous risks even to broach the subject of change. First they would have to agree on who a viable alternative to Putin might be, if their threats of pushing him out are going to be credible. Who other than Putin could provide for their personal financial needs while maintaining control of a vast country that faces huge demographic, economic, and foreign policy challenges? Maybe there is such a candidate, but if so, the outside world doesn't know who it is. As scholar Henry Hale points out, in authoritarian systems elites have to believe in an alternative leader's overwhelming strength before they are willing to switch loyalties.

What makes this even more unlikely is that many of Putin's closest supporters are former KGB and FSB operatives. That makes them inherently untrustworthy as partners in pushing for change, because they can use deception and other KGB techniques against each other for their own personal benefit. Let's imagine how things might unravel. Crony A might suggest to Crony B that it's time for Putin to go. Crony B could then pretend to agree, just to stick a knife in Crony A's back by revealing the details of Crony A's disloyalty. That happened often in Stalinist times; it was a way for political competitors to get rid of each other. When Putin received Crony B's revelation about Crony A's duplicity, he could use his KGB networks to release kompromat, compromising personal or financial information, to punish Crony A and send a message to everyone about his own continuing strength. We have repeatedly seen how Putin is capable of selectively prosecuting people for financial crimes, most recently billionaire Vladimir Yevtushenkov.

The chance that any member of Putin's circle would take such risks is undercut by the fact that the cronies aren't losing much under the current sanctions regime anyway. Many can find substitute deals in China or elsewhere, making the sanctions inconvenient, not devastating. And the sanctions mostly hit the income of Putin's cronies, not their wealth. Many cronies are not the owners of their firms, but instead board directors of state-owned enterprises. Their profit doesn't come from share prices, but instead from their personal cut of the contracts they approve.

Meanwhile their wealth is probably stored in offshore accounts--and if they are already multi-millionaires or billionaires, they won't much care about missed new profits. The sanctions might not last long anyway. A meeting of European Union representatives on September 30 may review the sanctions, after assessing the progress of the Minsk ceasefire agreement. And an announcement by ExxonMobil that it struck oil in Arctic prospecting with Rosneft will put political pressure on Obama to lift the sanctions restricting Arctic investments. The cronies can wait out the West.

That doesn't mean that sanctions should be lifted immediately. Putin would take that as a sign of Western weakness. But there's an alternative to consider: sanctions against Russia could become a bargaining chip in United Nations negotiations over Iran.

Right now Russia is bolstering the Iranian side, making it less likely that the remaining sticking points in the negotiations will be overcome by the November 24 deadline for a comprehensive deal on Iran's nuclear centrifuges. Yet Russian security would be harmed by Iran's development of nuclear weapons. Moscow's primary goal is to keep its lucrative nuclear energy and conventional weapons deals in place with Teheran, not to give Iran nuclear weapons breakout capability. A bargain could be struck, trading Russia's cooperation on both Ukraine and Iran for an end to sanctions. This would be following a precedent from 2010, where the U.S. lifted bilateral sanctions on Russian defense contracts in return for Moscow's vote on a UN Security Council resolution that stopped most weapons sales to Iran.

If such a deal happens, look for it in mid-November. Once the midterm elections are out of the way, Obama won't have to worry about looking soft on Russia. And Republicans will probably look favorably on ExxonMobil's profits from Russian Arctic oil.