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02/12/2016

Why the EU’s sanctions against Russia could backfire

Global Europe

Why the EU’s sanctions against Russia could backfire

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Europe has threatened to move into the "third stage" of sanctions against Russia, a move that could turn the confrontation with Moscow into a full-blown economic war that would likely hurt both sides. EurActiv France reports.

"We have asked the Commission today to look at possible broad-based economic sanctions" against Russia, stated Angela Merkel, the German chancellor, on Thursday evening (20 March).

For the third stage of sanctions to come into force, officials would have to follow a strict procedure. Governments would have to hand the EU executive a mandate to determine the sanctions and call another EU summit to take the formal decision.

Diplomatic sources cited the industry and the banking sectors as possible targets but would not go into more detail yet.

Meanwhile, Moscow said it was ready to retaliate, with draft legislation for the confiscation of Western assets in Russia already in the pipeline.

Who is likely to suffer most?

Russia is Europe’s third largest trading partner, after the United States and China. Russian trade accounts for approximately 7% of EU exports and 12% of imports. Trade flows are well structured: Europe mainly imports fuel and power products such as gas and crude oil, and exports manufactured products such as machinery, transport equipment and chemicals.

Russia is a premium market for many European countries, such as Germany, but also Poland, the Netherlands, Italy and the UK. Europe is also Russia’s economic partner of choice and accounts for approximately half of its economic output.

Steady Growth

Euro-Russian trade has grown steadily. According to Eurostat, from 2002 to 2012 European exports to Russia more than tripled from €34 billion to €123 billion, whilst imports witnessed a similar upward progression, from €65 billion in 2002 to €215 billion in 2012. The Russian trade deficit has also increased from €31 billion in 2002 to €92 billion in 2012.

The main actors

Among European countries, Germany is by far the largest exporter to Russia. German exports account for 30% of EU exports, or the equivalent of €27.5 billion. It is followed by Italy (€8 billion, or 9% of EU exports), the Netherlands and Poland (€6.1 billion each, or 7%), and France (€6 billion, also approximately 7%).

The largest importers of Russian trade, mostly gas and crude oil, are once again Germany (€28.8 billion, or 19% of all EU imports), followed by the Netherlands (€22.4 billion, or 14 %), Italy (€14.9 billion, or 10%) and Poland (€13.9 billion, or 9%). France imports relatively little and shares fifth place with Belgium (€7.9 billion).

Fears in Finland…

Finnish exports have already fallen victim to the downturn of the rouble, reports the daily Kauppalehti. The food-processing industry has been affected, whilst a ban on Russian visas could see profits in the tourist industry cut by half. In 2013, Finnish exports to Russia had already declined by 6%.

… in the Netherlands

The Anglo-Dutch company Shell has important stakes in Russia and the Russian gas giant Gazprom has operations in the Dutch province of Groningen. More broadly, potential sanctions against Russia would affect almost all of Europe’s large energy companies. The British multinational oil and gas company, BP, could be hit as 20% of the company is owned by Rosneft. The US company Exxon Mobil and the Italy's ENI would also suffer.

… and in Germany

German companies have the highest investment in Russia and Ukraine, and will likely be the first hit by economic sanctions. German shares have been erratic over the past days, recording significant declines whilst sustaining good results.

Automobile companies (such as Volkswagen and Continental), the industrial conglomerate Siemens, the retailer Metro (which has a strong presence in Russia), the energy companies E.ON and RWE, and even the telecommunications company Deutsche Telekom are particularly under threat.

Generally speaking, the stocks of companies established in Russia recorded drops relative to their presence. France’s Société Générale (working with Rosbank in Russia) and Renault (with Avtovas) are concerned, but also the Danish brewing company Carlsberg, the Austrian bank Raiffesen, its Italian counterpart, Unicredit, and the Finnish tyre manufacturer Nokian Tyres.

Crisis comeback

After four years spent fighting the financial, economic and sovereign debt crises, European leaders are reluctant to compromise the fragile recovery that has taken hold. Added to this is the fact that Russia has its own means of reprisal.

The presence of Russian oligarchs in many banks and companies, notably in the south-east of Europe (Bulgaria, Cyprus, Greece) but also in Italy, is an important factor. Promises of cheap gas to countries like Greece, which are trying to kick-start economic growth, is a further reason. Indeed, the Ukrainian crisis could be costly for Europe and could jeopardise the economic recovery.

Another financial crisis would be disastrous for those countries that are still struggling economically, especially if oil prices increase. It would raise energy costs for Europeans while adding to Russian profits.

The arms embargo requested by the UK and Sweden also poses problems. For France it means suspending a deal to supply the Russian navy with two projection and command ships (BPC). This would put hundreds of people out of work and possibly incur a fine from Russia.

France is not the only country concerned; certain German companies such as Rheinmetall have signed contracts with Russia, notably to supply a combat simulator to the Russian army. Berlin announced on 19 March that the Rheinmetall contract was suspended until further notice.

Other countries (Austria, Belgium, Italy, Bulgaria…) also export weapons to Russia. The stakes are high as the Russian backlash could be severe.

Eastern European Countries, which use Russian type “Mi” (Mi8, Mi17, Mi24) helicopters, risk problems in relation to the supply of replacement parts.

The new nuclear: The economy

Russia also has limited economic firepower, as it could become a “risk country” for foreign investment. Economic ties could have the stabilising role previously played by nuclear weapons, during the Cold War.

Background

The former Ukrainian government announced on 21 November that it had decided to stop its preparations to sign an Association Agreement (AA) with the EU.

An Eastern Partnership summit in Vilnius on 28-29 November 2013 ended with a major disappointment for the EU, as Ukraine’s president, Viktor Yanukovich, decided to put off the signature of a landmark Association Agreement (AA), coupled with a Deep and Comprehensive Free Trade agreement (DCFTA). Meanwhile, Yanukovich turned to Russia, obtaining a $15 billion loan and cheaper gas.

Following the news that their country had turned to Russia, pro-European Ukrainians staged protests which developed into a popular revolution to oust Yanukovich.

On 18 February at least 26 people lost their lives during violent clashes with the government. The Ukrainian president accused the leaders of the pro-European opposition of trying to take power. On 20 February at least 47 people were killed in the centre of Kiev, many by government forces. On the same day, the EU ministers met in Brussels and imposed sanctions on the Ukrainian representatives responsible for the massacre.

On 21 February, the leaders of the pro-European opposition signed a peace accord with President Viktor Yanukovich under the guidance of the EU. Despite this, protesters refused to back down until the Ukrainian president resigned. On 22 February, Viktor Yanukovich fled from Kiev. The president of the Ukrainian parliament, Olexandre Tourtchinov, then became interim president. A government was formed on February 26.

Timeline

  • 25 May : General elections in Ukraine