Financial News

  • 22 July 2014, 8:39

Europe's Sanctions On Russia Avoid Self-Harm

Sanctions against Russia have now been in place since its annexation of Crimea in March - but following the flight MH17 disaster, all the signs are that they will soon be reinforced.

So what, precisely, do the current sanctions consist of, have they been at all successful, and what might they be followed up with?

In short, the current set of restrictions are, in the jargon, referred to as "stage-two" sanctions.

Rather than affecting the entire economy, or entire sectors, they are forensically focused restrictions on a few individuals and smallish companies.

Both the US and Europe have imposed visa restrictions and asset freezes on a number of influential Russians. The US list is longer and includes a number of President Vladimir Putin's most senior advisers.

Neither jurisdiction has yet added the president to the sanctions list, as was done with Robert Mugabe in Zimbabwe, for instance.

The US has also imposed financial blocks on two small banks, one of which Putin claimed never to have heard of.

The day before the crash last week, it also extended the restrictions to a couple of oil companies, including Rosneft, the country's biggest oil producer.

However, it's worth noting that these are purely financial restrictions, preventing the companies from raising cash in the US, rather than stopping them from pumping oil out of the ground and around the world.

While the EU has signalled it will stop European Investment Bank and European Bank for Reconstruction and Development programmes in Russia, it has stopped short of more severe sanctions.

Why? In large part because of its reliance on Russia for trade. A full 15% of Russia's gas exports end up in Germany. Some 17% of its trade goes to the Netherlands, though this is probably an over-estimate because much of that is merely passing through the port of Antwerp.

While Mediterranean parts of the continent have less direct economic exposure to Russia, save for Italy, which sucks in 9% of Russia's gas, they are also desperate not to upend any chances of an economic recovery following the euro crisis.

It's very difficult indeed to find any evidence that the sanctions themselves have made much difference.

The Russian economy is in a recession, but it was already heading in that direction before the Ukraine crisis.

And while investment and share prices have both fallen in Moscow, that seems due to fear of "proper" sanctions rather than the semi-sanctions now in place.

So what more can be done? The short answer is to extend the sanctions to some sectors, or some mega-companies, and individuals.

Open Europe's Raoul Ruparel thinks a three-pronged approach, involving roughly equal sacrifice from the continent's biggest players, would be most reasonable: Some financial sanctions (which would hurt Britain); some arms sanctions (which would hurt France) and some manufacturing and technology sanctions (which would hurt Germany).

But such system-wide sanctions - "stage three" measures, as they are called - are far from decided.

They would be deeply controversial, and raise the risk, feared by all in Europe, that Putin could retaliate by cutting off the gas supply to Europe.

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