The West's Tricky Economic War With Russia

What if Russians are feeling the squeeze of sanctions but Putin doesn't care?

The mere threat of additional Western sanctions against Moscow this week sent Russia's currency to new lows; it's down 12 percent this year. Inflation is expected to rise at least 1 percentage point. More than $100 billion in capital has already fled the country, by some estimates. Russia is feeling the Obama administration's intended financial pain. The only problem is that its faltering economy hasn't dissuaded President Vladimir Putin's Ukrainian ambitions.

The conflict in eastern Ukraine is hurting Russia in terms of lost investment, higher inflation, slower growth, and declining asset values. The ruble sank to new depths, dipping below 37 rubles to the dollar before recovering slightly, this week. Analysts' inflation expectations are up; according to a Reuters survey, 15 Russia watchers now expect inflation to hit 7.2 percent by the end of the year, in part because of Moscow's ban on Western food imports. According to the Russian government, $75 billion left the country in the first half of 2014, and officials predict that number will hit $100 billion by the end of the year. Others think that much is already gone. U.S. President Barack Obama said on Aug. 6 that between $100 billion and $200 billion has already fled the country. On Monday, Sept. 1, Russia's Economic Development Ministry downgraded growth expectations from 2 percent to 1 percent for 2015. Growth has already fallen below 1 percent for the first half of 2014, according to the World Bank.

The confluence of economic bad news with Putin's most aggressive stance in Ukraine brings to the fore a question that lingers under all sanctions programs: What if the targeted government doesn't care about the economic pain?

"The West needs to realize that economic and financial measures imposed to date haven't been effective in deterring Putin's ambitions in Ukraine -- and that even a maximalist financial isolation campaign alone may not be enough to stop Russian adventurism," Juan Zarate, a former senior Treasury Department official charged with overseeing sanctions for George W. Bush's administration, said in an email.

Investors' message to Putin is clear. A brief cease-fire agreement Wednesday pushed the ruble up 1.7 percent and sent the Russian Micex stock index climbing 3.5 percent, according to Bloomberg. But Ukraine quickly retracted the announcement after Moscow said it wasn't a party to the conflict and, therefore, couldn't strike a cease-fire deal. Putin later said that he had reached an agreement with Ukrainian President Petro Poroshenko to end the fighting in eastern Ukraine that included Kiev pulling troops out of the region, according to Russian state-owned media. Markets would doubtless welcome a return to peace, but uncertainty lingered Wednesday as to whether peace truly was on the horizon.

Obama greeted the cease-fire announcement with skepticism at a press conference in Tallinn, Estonia, where he was on a stopover before attending the NATO summit in Wales Thursday and Friday.

"No realistic political settlement can be achieved if effectively Russia says we are going to continue to send tanks and troops and arms and advisors under the guise of separatists, who are not homegrown, and the only possible settlement is if Ukraine cedes its territory or its sovereignty," Obama said on Wednesday.

The White House points to the billions of dollars moving out of Russia, the volatile Micex stock index, and the ruble's falling value as evidence that sanctions are inflicting economic pain. But if the goal of the sanctions was to get Putin to stop bullying Ukraine, then they have yet to hit the mark. Instead, Putin is telling the head of the European Union that he could conquer Kiev in two weeks -- if he wanted to. Yuri Ushakov, a Kremlin foreign-policy advisor, told the Guardian on Tuesday that Putin's remarks were taken out of context. NATO plans to station rapid-response forces to protect Eastern Europe, though it's unclear whether the United States -- the most powerful military in the 28-member alliance -- will participate.

Meanwhile, leaders on both sides of the Atlantic are again sifting through a variety of incremental financial measures to further isolate Russia's economy. Whether Russia would have been even more aggressive in the absence of sanctions is anyone's guess.

Yet Putin's unchanged stance toward Ukraine and Russian troops' engaging directly with Ukrainian forces have prompted calls for the West to send military support to Kiev. Top U.S. senators, including Republican John McCain and Democrat Robert Menendez, head of the Senate Foreign Relations Committee, want to arm the Ukrainians. But that position is not expected to gain wider traction.

"My guess is that, absent a dramatic change in the situation in Ukraine, the West will soon apply additional sanctions," Steven Pifer, a former ambassador to Ukraine and a senior fellow at the Brookings Institution, said in an email. "Providing arms may be a tougher question for [the] U.S., [and] other Western leaders."

The EU is considering implementing a new round of sanctions this week, but observers expect those to only incrementally tighten existing restrictions. European leaders could still postpone their next step to see whether Russia's cease-fire plan sticks. The toughest sanctions proposal on the table would strengthen prohibitions on Western investors lending money to Russian state-owned companies, according to a draft obtained by the Financial Times. EU leaders might also boycott the 2018 World Cup in Russia, according to the draft. The West's step-by-step approach has prompted criticism from some observers and ridicule from others.

"EU looking at banning double espresso sales in Russia," Tim Ash, head of emerging-markets research at Standard Bank, joked in an emailed analyst's note on Tuesday. "Single espresso sales will still be allowed for the time-being as the EU wants to give Putin plenty of opportunity to ramp down."

The West is going to financial war not with the weapons it has, but with the ones it is willing to use. For example, Europeans and Americans are not expected to restrict Western companies from handling Russia's sovereign bonds or ban Russia from using the international banking transactions system SWIFT (Society for Worldwide Interbank Financial Telecommunication). British officials advocated the move last week, according to a draft policy document obtained by Bloomberg.

Shutting Iran out of the SWIFT system, a crucial communications network for international banking, in 2012 was a turning point in the West's effort to isolate Tehran financially in order to get the government to stop its nuclear program. Many see the actions taken against Iran as a template for sanctions against Moscow, though Russia's economy is much more interconnected with the global -- and particularly European -- economy and its GDP is at least five times that of Iran's.

"They're going to be moderate so that we can continue telephone diplomacy with Putin," Mujtaba Rahman, Eurasia Group's head of European risk analysis, said from London. He said the debate has shifted in Europe toward potential military options, because economic deterrents aren't working. However, he expects more sanctions will be central to the European response as policymakers are unlikely to agree on a military solution.

Sanctions are also limited by the amount of economic pain Western countries are willing to endure in order to punish Russia. Europe's dependence on natural gas imports from Russia means that the bloc's economy could be severely damaged if Moscow decided to retaliate by turning off the spigot.

But European leaders have become more willing to take measures that could hurt their own economies as Russia has become more menacing in their view. French officials said Wednesday that they wouldn't allow the delivery of the first of two Mistral warships Russia ordered. France will likely have to return whatever Russia has already paid of the $1.6 billion price tag. Russian officials said the two ships were already two-thirds paid for, according to Bloomberg. That's a reversal from July when France defiantly refused to reconsider the contract, even in the face of criticism from other Western leaders. The United Kingdom was viewed as unlikely to strike out at Russia, thereby preserving London's place as a global finance hub for Russian businesses. Now British officials are advocating some of the toughest financial measures yet against Russia. As the conflict drags on, Europe's pain threshold could increase further.

Former Treasury Department sanctions official Elizabeth Rosenberg, who is now a senior fellow at the Center for a New American Security, said that was the case with Iran. Initially, the United States had trouble getting other countries to sign on, but as European leaders saw Tehran as more and more of a threat, they became more willing to reduce their economic ties, no matter the cost.

"The more that political circumstances escalate, it might be that there is a growing appetite for economic pain," Rosenberg said about Europe's view of the Ukrainian conflict. "I would urge caution for anyone suggesting that sanctions have been a failure."



Lady al Qaeda: The World's Most Wanted Woman

The Taliban wanted to trade Bergdahl for her. The Islamic State offered to swap Foley. Why does every jihadi group want the U.S. to free Aafia Siddiqui? 

Two years ago, a group of senior U.S. national security officials received a tantalizing proposal from officials in Pakistan. If the United States would release a Pakistani woman serving a lengthy prison sentence in Texas for attempted murder, Islamabad would try to free Army Sgt. Bowe Bergdahl, who had been missing since 2009 and was thought to be held in Pakistan by Taliban forces.

According to current and former U.S. officials familiar with the proposal, President Barack Obama's national security advisors swiftly rejected the offer. To free the prisoner, Aafia Siddiqui, who's linked to al Qaeda and was convicted in 2010 of attempting to kill Americans in Afghanistan, would violate the administration's policy of not granting concessions to terrorist groups, the officials concluded. It would also put a potentially dangerous fighter back on the street. Siddiqui, 42, who's known in counterterrorism circles as "Lady al Qaeda," has been linked to 9/11 ringleader Khalid Sheikh Mohammed and was once on the FBI's most-wanted terrorists list. Educated in the United States -- she studied at M.I.T. and received a doctorate from Brandeis -- Siddiqui was arrested in 2008 in Afghanistan carrying sodium cyanide, as well as documents describing how to make chemical weapons and dirty bombs and how to weaponize Ebola. When FBI and military officials tried to question Siddiqui, she grabbed a weapon left on the table in her interrogation room and fired upon them.

Although U.S. officials never seriously considered trading Siddiqui, she has been a perennial bargaining chip for terrorists and Islamist militants who've made her release a condition for freeing a number of American and European prisoners over the years. The militants had repeatedly threatened to execute Bergdahl if Siddiqui wasn't set free. And the Islamic State terrorists who murdered American journalist James Foley last week had demanded Siddiqui's release to spare his life.

On Tuesday, the Islamic State again demanded her freedom, this time in exchange for a 26-year-old American woman kidnapped last year in Syria while working with humanitarian aid groups. Officials believe the Islamic State is holding at least four American prisoners, including journalist Steven Sotloff. The militants have also insisted upon a $6.6 million ransom for the young American woman, whose family doesn't want her identified. The Islamic State's demands were first reported by ABC News.

While the White House has steadfastly refused to put Siddiqui's release on the table in negotiating for American prisoners, a team inside the Defense Department has proposed trading her for American captives, according to a U.S. lawmaker.

"We are aware of at least one entity in the Defense Department that has developed possible options to trade Siddiqui. And we can say with certainty that the option was weighed for Bergdahl and several others in captivity," said Joe Kasper, a spokesman for Rep. Duncan Hunter (R.-Calif.), a senior member of the House Armed Services Committee and a former Marine who has criticized the Obama administration for not doing more to free American prisoners.

A heated debate over whether the U.S. government should pay ransoms or conduct prisoner swaps in order to free American captives erupted after Foley's murder. The United States, unlike many European countries, doesn't pay ransoms. Some terrorism experts say that Americans are less likely to be kidnapped as a result. But some former prisoners and their families want the government to pony up if doing so will free Americans.

Kasper said the Siddiqui option in Bergdahl's case never reached Defense Secretary Chuck Hagel. "That's a real shame, because right or wrong on trading Siddiqui, all valid options should be explored and exhausted," he said.

Senior administration officials said they were unaware of any proposal by a Pentagon unit to offer Siddiqui's freedom as part of hostage negotiations. And acquiescing is legally complicated, experts said. President Barack Obama would possibly have to pardon Siddiqui or commute her sentence because the United States and Pakistan don't have a treaty allowing Pakistanis incarcerated in the States to serve out their sentences back home. Experts said that the administration could probably have fashioned some solution, but doing so would have opened the White House to criticism that it was directly negotiating with terrorists.

And yet Bergdahl, for whom swapping Siddiqui was at least briefly considered, was ultimately freed in May in exchange for five high-ranking Taliban prisoners held at Guantánamo Bay, Cuba. That deal was criticized as a concession to militant groups and as a potential security risk. U.S. intelligence agencies two years ago concluded that those prisoners would eventually return to hostilities against the United States, according to a former senior official who helped write the assessment. The prisoners were remaindered to the Qatari government, which is to keep them in custody until next year.

Current and former officials have said that trading the "Taliban 5" for Bergdahl was in line with the tradition of exchanging prisoners in wartime and part of a broader effort to enter into peace negotiations with the Taliban to end fighting in Afghanistan. In that sense, officials have argued, Bergdahl's release was fundamentally different than any proposed swap for Siddiqui.

"I'm not going to get into any alleged internal deliberations and what ideas may have been generated, if any, on this issue," White House spokeswoman Caitlin Hayden told Foreign Policy. "Aafia Siddiqui is serving a sentence of 86 years in prison for the attempted murder and assault of U.S. nationals and U.S. officers and employees in Afghanistan. The United States government, as a matter of long-standing policy, does not grant concessions to hostage takers. Doing so would only put more Americans at risk of being taken captive."

Siddiqui is something of a cause célèbre in Pakistan, where her 2010 U.S. conviction sparked numerous protests. "The reaction to the Siddiqui verdict was front-page news in all the major newspapers," according to a U.S. State Department cable obtained by WikiLeaks. "A number of press articles condemned the U.S. and blamed the verdict on anti-Muslim bias," the cable read, noting that Siddiqui's conviction also "resurrected familiar allegations" that she'd been kidnapped by Pakistani intelligence agencies and the FBI, illegally detained in Afghanistan, and "physically and mentally abused by American soldiers." Some Pakistanis also protested their own government "for failing to do more to secure the return of Siddiqui and for its allegedly muted response to the verdict," the cable read. Her conviction bolstered ongoing internal criticism that the Pakistani government is too close to the United States, which has for years launched drone strikes on Pakistani soil with the consent of the country's leaders.

In Pakistan, a group of militants calling itself the Aafia Siddiqui Brigade has attacked government facilities in order to avenge what they see as her unfair trial and wrongful incarceration. A 2012 bombing of a police van in Peshawar that killed two officers, as well as a 2013 attack on a judicial complex that killed four people and wounded more than 50, were reportedly blamed on the pro-Siddiqui group.

Siddiqui's release has figured in several lower-profile prisoner negotiations, and not just for American citizens. In 2010, the Taliban demanded her freedom in exchange for British aid worker Linda Norgrove. The following year, a top Taliban official offered to swap her for two Swiss citizens who'd been kidnapped in Baluchistan. And al Qaeda leader Ayman al-Zawahiri has called for Siddiqui's release in exchange for freeing American contractor Warren Weinstein, who was kidnapped in Pakistan in 2011 and is now in al Qaeda custody, according to U.S. officials.

Kasper, the spokesman for Congressman Hunter, doubted that Siddiqui posed a serious risk to U.S. security and suggested that she was mentally impaired and likely incapable of carrying out any of the deadly attacks she may have been plotting when she was arrested. "If done correctly, there might have been ways to make [an exchange] work," Kasper said, adding that the possibility of freeing her for Bergdahl and others has never been properly presented to "the right entity within [the Defense Department]."

That assessment is at odds with former U.S. officials who said that Siddiqui's possible release for Bergdahl was quickly dismissed as unrealistic. But al Qaeda, the Taliban, and the Islamic State don't appear to have gotten the message that the United States will not trade the imprisoned scientist.

In a letter published by ABC News, Siddiqui's family members said they were "very distraught" that her name had been invoked in the latest demands over the 26-year-old American woman held by the Islamic State.

"If the issue is true, we would like to state that our family does not have any connections to such groups or actions," the letter reads. "We believe in a struggle that is peaceful and dignified. Associating Aafia's name with acts of violence is against everything we are struggling for."

The family added, "While we deeply appreciate the sincere feelings of those who, like us, wish to see the freedom of our beloved Aafia, we cannot agree with a 'by any means necessary' approach to Aafia's freedom. Nor can we accept that someone else's daughter or sister suffer like Aafia is suffering."