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The Ball Back in Putin’s Court: European Sanctions

Commentary, 23 July 2014
Sanctions, Europe
European Union member states are struggling to form a united front to enforce sanctions against Russia following the downing of flight MH17. For sanctions to be effective, Europe needs to focus on how effective they are willing to make them and how far they are willing to commit to them.

European Union member states are struggling to form a united front to enforce sanctions against Russia following the downing of flight MH17. For sanctions to be effective, Europe needs to focus on how effective they are willing to make them and how far they are willing to commit to them.

 EU-Russia Summit Jan 2014

The meeting of European foreign ministers has resulted in the promise of further sanctions on those involved in the Ukraine crisis. The EU plans to add members of 'Vladimir Putin’s inner circle' to the sanctions list by the end of the month and will introduce wider sectoral sanctions if Russia fails to cooperate with the MH17 investigations and ceases the flow of military support to the separatists.

Another red line has been set to give Putin a chance to back down. Although diplomatic channels are always preferable over sanctions, the EU was under pressure to return a united and forceful response in light of recent events and the deaths of many EU nationals. Instead, the response has not only been vague but once again demonstrates the limitations posed by the member states’ bilateral relationships with Russia.

A Lack of Cohesion, Even in Spirit

A consensus on any effective energy sanctions, the staple of the Russian economy, would be almost impossible for the EU to achieve. Therefore, it appears to have been left off the table. Germany relies on Russia for approximately 36% of its gas imports and 39% of its oil imports, and Germany recently sold one of Europe’s largest gas storage facilities to Gazprom. Italian energy company Eni is part of the consortium that works on the South Stream pipeline, which would supply Russian gas to Europe. This project was halted in June on the request of the EU. In the same month Austria chose to sign a deal with Russia agreeing to build a branch of this pipeline, ensuring very mixed messages to Russia as to how committed Europe would be on sanctions.

An arms embargo is part of proposed sanctions. There is some debate as to how much Russia actually depends on Europe for its defence procurement and thus how effective this would be. At least in principle it would be unwise to continue fulfilling defence contracts with Russia amidst accusations that Russia is arming separatists in Eastern Ukraine. 

The main defence focus has been on the French €1.2 billion deal with Russia to deliver two Mistral warships. Although France is within its right to keep to the contract, like Austria’s signing of the South Stream deal, it points to the EU’s lack of commitment on a tough stance towards Russia. France is not the only one engaged in Russian defence contracts, causing allegations of hypocrisy amongst member states. Germany recently built a high technology military training facility in Russia for $163 million and Britain maintains 251 export licenses worth approximately £132 million with Russia.

The strongest features of the sanctions pertain to dual-use technology, access to capital markets and targeting influential individuals. Russia in particular does benefit from technology imports, given the lack of diversification in its economy. Access to capital markets and financial institutions abroad are crucial for Russian business and investment. Targeting influential individuals is a way to get Putin’s attention, and it also has fewer knock-on effects for the EU economies. However, it remains to be seen which individuals will be targeted and how the sector sanctions will be implemented if indeed Putin does not comply with the EU’s requests. A key weakness in the announcement is that by waiting to publish the names, the EU has given Russian investors time to make alternative plans for their assets.

Business and Investment is Key

A way in which the EU could influence decision-making in Russia is through Russian business in Europe. A limitation for EU sanctions has been that it maintains a position of logic that targets only those who have benefited from the destabilisation of Eastern Ukraine. To date, this has mainly translated into Russian and Ukrainian politicians and separatists involved in events in Crimea and Eastern Ukraine, which will have little impact. Although it may sit uncomfortably with the EU, widening the list to include prominent Russian business people would be effective.

The City of London has so far been protected from sanctions for fear of damaging the British economy. London is a key hub of investment for Russian individuals and businesses, whether it is listing companies on the London Stock Exchange, buying up expensive real estate, facilitating business disputes by filing in London Courts or investing in asset management firms specialising in high net worth individuals. For wider Europe, safe havens for Russian money used in Latvia, Cyprus, the Netherlands and Switzerland (although not an EU member state, it has introduced its own sanctions) are crucial to Russian business. Yet this has not received much discussion.

There is no doubt that sanctions have had a negative impact on the Russian economy and will continue to do so. However, the aim of the sanctions is not to ruin the Russian economy, but to use targeted economic leverage to persuade Russia to cooperate in resolving the Ukraine crisis. There are signs that Russia’s defiance of Western sanctions is unsustainable, despite initially dismissive statements on the issue from the Russian government. Russia’s former Finance Minister Aleksei Kudrin has stated that Russia’s trajectory towards isolationism as a result of the Ukraine crisis is at odds with the business community’s desire to invest. This could provide a platform for a change in course. However, instead of focusing so much on demonstrating a united approach, Europe needs to focus on how effective they are willing to make them and how far they are willing to commit to them.

Author

Sarah Lain
Associate Fellow

Sarah Lain is currently a Research Advisor, based in Kyiv. She previously served as a Research Fellow at RUSI in the International... read more

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