Since July 31 2014, the EU’s first economic sanctions against Russia have been active - long awaited by the European public, and demanded by the US. However, a deeper consideration reveals that the EU’s tougher approach is more of an appearance than substance. A report by Stefan Bernhardt
The EU’s first hard economic sanctions against Russia in the Ukraine conflict focus on the financial, energy, and military sector. The sanctions seem able to hit Moscow seriously. However, the measures’ details clarify that they are not hard sanctions but instead an attempt to escape the growing pressure. The Kremlin subsequently answered with even more painful counter-sanctions.
Aim of the sanctions imposed by the EU
The new economic sanctions were triggered by the crash of the passenger aircraft MH17 from the Netherlands, which led to the death of all its passengers. The international discussion on the crash site’s examination and accusations increased the pressure on the EU to impose economic sanctions against Russia.
The sanctions are supposed to force the Kremlin to give up its support for the pro-Russian separatists. Whether sanctions are an adequate instrument or a contribution to conflict solution is arguable. Nevertheless, they form the primary approach of the EU.
The financial sector
Russian banks that are predominantly owned by the state now have limited access to the European financial market. However, the details mentioned in the EU’s press release clarify that these sanctions solely complicate the trade with securities. Only new transactions and securities that have a term longer than 90 days are affected. Furthermore, the banks’ subsidiaries located in the EU remain unmentioned and, apparently, can go on trading as usual.
This should neither affect Russian banks hard nor redirect their financial business to other states. Although this requires an increasing effort from the bank to conduct their business, a real restriction, along with sensitive financial losses, is not expected. This is a surprising measure of the EU since global finance markets are in direct competition with one another: If a capital market turns out to be less attractive, the capital is transferred to another financial center. Therefore, the EU member states avoided, for instance, a taxation of share deals because it feared that financial operations would be taken to other countries like, for example, Singapore. The losses will then be counted on the EU’s side, where capital is alienated.
High technology sector
The sanctions regarding the high technology sector particularly concern the special production technology for oil; the gas sector remains unaffected. The Russian revenues in this sector are barely hit. In the long term, it could be the EU that is hit since, if less oil were produced or available, oil prices would rise. Russia’s other economic sectors that receive high technology from the EU can suffer sensitively from the sanctions. Nevertheless, this only concerns companies that do not have the opportunity to find alternative trade partners in Asia.
Russia’s most sensitive economic area is oil and gas since the Russian state requires the income from these sectors for investments in its economy, social welfare, and for reserve assets. Therefore, pressure on the Kremlin at this place would be especially painful. The EU, being the most important sales market in these areas, would be in a good position even if this would be to the detriment of the EU, too. This potential, however, remains unused by the EU.
More comprehensive – and with less exceptions – are the sanctions regarding military goods or dual use goods, goods which can be used both militarily and civilly. These will be prohibited completely. Therefore, in- and exports from/to Russia will no longer be possible.
Like all decided sanctions, they affect new contracts but not already existing ones. Additionally, Russia’s military trade with the EU is relatively meager. Both have a large military industry that does not rely on one another or need the other one as a sales market. Thus, the purchase of military commodities from the EU is rather selective and has no special potential to generate pressure.
The Kremlin’s reaction followed relatively fast: Russia, as a counter-sanction, stops importing agricultural products from the US, Canada, the EU, Australia, and Norway. At first, the Russian sanctions seemed like an act of defiance that would obviously first affect the Russian consumers with rising prices. But the Russian sanctions are complex: Moscow uses them to become more economically independent from the West, to strengthen its own agriculture, and to hit the EU noticeably.
The Russian agriculture cannot compete with the price of subsidized EU agricultural products. Furthermore, the Russian state has no instruments at its disposal to support its own agriculture against cheap competitors from the EU. The EU’s sanctions gave the Kremlin the perfect excuse to ban the cheap competition and, by doing so, to help the Russian agriculture to gain additional market shares. The sanctions are accompanied by an advertisement campaign that encourages buying Russian products. Eventual shortcomings in meat production could be met by new partners like Argentina.
As a result, problems loom ahead in the EU as the Russian state strikes its revenues: Germany, for example, immediately responded by offering a prospect of aid money for its own farmers, which illustrates the financial effects on European farmers in general. Moscow, in contrast to the EU, uses its economic potential as a necessary, lucrative sales market against an export-dependent EU.
Thinking ahead helps
The EU-sanctions are timid, and designed to minimize the growing pressure on EU politicians. The restriction to new contracts only lends a symbolic character to the sanctions without the potential for pressure. Basically, they prevent the Kremlin from buying certain goods from the West. The burden is carried by European companies that consequently lose revenues. It would have been a more intelligent approach to sanction the access of Russian products to the European market; this would have led to a conspicuous loss of revenues for the Russian economy.
Moscow’s reaction exploits exactly this: The EU is economically dependent on its exports in many areas and Russia is an important sales market for it. The Kremlin thereby not only blocks EU products but also uses the sanctions to support a weak agricultural sector which could not compete with the EU goods on price for a long time, and to look for alternative partners.
The new EU sanctions against Russia, which were imposed in September 2014, been designed again as defective. Sanctions against the Kremlin during a timid peace process in Eastern Ukraine are counterproductive. To refuse Russian banks loans in the EU, however, is the first measure that can exert pressure, as banks miss an important capital for investments. The other new measures are more damaging the EU again than before.