Why sanctions on Russia may not bode well for the European Union
Must-know: Will the Russian economy crash like the Boeing 777? (Part 8 of 12)
Russian sanctions could impact the European Union
While the U.S.-Russia relations have always been under the spotlight, Europe’s relations with Russia can’t be undermined at any cost. The European countries together do ten times as much trade with Russia as the United States alone. Also, they depend heavily on Russia for their natural gas needs.
Europe joins U.S. in imposing sanctions against Russia
A week after the MH17 Malaysia Airlines Boeing (BA) 777 flight crashed in Ukraine killing ~300 people, Europe decided to move towards targeting sectors of Russia’s economy with its sanctions.
Accordingly, the 28-member European Union (or EU) reached an outline agreement on July 25 to impose the first economic sanctions on Russia over its behavior in Ukraine. EU ambassadors reached a preliminary deal to go further in sanctioning Russia, targeting its access to European capital markets and trade in the defense sector, dual-use goods, and sensitive technologies. EU officials also suggested sanctions that would prevent Russia from using European lending institutions and ban Europeans from buying new debt from Russia’s largest banks, many of which are state-controlled. However, they scaled back their scope to exclude technology for the crucial gas sector.
The EU sanctions
The EU has subject 15 officials and 18 organizations or businesses in Russia to asset freezes and visa bans.
The travel bans and asset freezes have been imposed on the chiefs of Russia’s Federal Security Service and foreign intelligence service and a number of other top Russian officials, who had helped shape the Russian government’s policy that threatened Ukraine’s sovereignty and national integrity. The new measures, designed to put pressure Moscow and its allies in Ukraine, were announced in the EU’s Official Journal, and took effect immediately.
The latest sanctions have brought the total number of people under EU sanction in connection with Russia’s annexation of Crimea and the revolt in eastern Ukraine to 87. Two Crimea-based energy businesses had already had their EU holdings frozen.
Russian officials will face asset freezes and travel bans
The latest additions include the head of the Russian Federal Security Service—Alexander Bortnikov, head of the FSB department that oversees international operations and intelligence activity—Sergei Beseda, and the director of the SVR foreign intelligence service—Mikhail Fradkov. Four members of Russia’s Security Council were also included on the EU list. Security Council Secretary Nikolay Patrushev, his deputy Rashid Nurgaliev, and fellow member Sergey Gryzlov also appear in the list, along with Chechen President Ramzan Kadyrev.
Impact of the EU sanctions on the Russian economy
Blocking European clients from the Russian markets would aggravate capital flows out of the country, which in 2014, have already reached $80 billion. This could prove to be a crippling drain on the economy, which is expected to grow at just 0.2% in 2014 according to the Internal Monetary Fund (or IMF).
Since the U.S. revealed its new list of sanctions on July 16, U.S. listed exchange-traded funds (or ETFs) investing in Russia such as the Market Vectors Russia ETF (RSX) and the SPDR S&P Russia ETF (RBL), which are heavily invested in top Russian firms like energy giant Gazprom (OGZPY) and Rosneft Oil Co. (OJSCY), have already seen their prices slump. These ETFs have seen a price decline of 7.48%, 7.52%, and 7.68%, respectively, from July 16–25.
Although the U.S. has been pushing the EU to increase sanctions against Russia, the European countries have much more to lose in cutting ties with Russia than their western allies. Europe’s biggest economic heavyweights—Germany, France, and Italy—have significant investment and trade ties with Russia. For example, one in every four foreign German companies operates in Russia. About a quarter of European countries completely rely on Russia for gas or oil supplies.
Also, there’s a degree of doubt associated with the practicality of economic sanctions, which so far, have had little effect on the Russian economy, and haven’t changed the course of events in Ukraine.
The sanctions imposed by the EU on Russia have become a sensitive subject in Germany. Among the 28 EU nations, Germany has the biggest trade with Russia. The next part of this series analyzes what Germany has to gain or lose as the EU imposes sanctions against Russia.
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