The European Union on July 29 agreed to more severe sanctions against Russia in response to its continued promotion of instability in eastern Ukraine. The U.S. quickly followed suit with its own set of expanded measures.
Yet the consensus among economists and political analysts is that the sanctions fall short of the measures required to curtail what the West claims are Russia’s destabilizing tactics in Ukraine.
The moves represent the toughest economic restrictions imposed against Russia to date, and the first by the EU towards so-called “stage 3” sanctions that target entire swathes of the Russian economy, especially the key sectors of energy, defense and finance.
The full list of restrictions and entities involved took effect on Aug. 1, following their publication in the EU Official Journal late on July 31.
In an official statement announcing the package, the EU said: “The package of new restrictive measures agreed today by the European Union constitutes a powerful signal to the leaders of the Russian Federation: destabilizing Ukraine, or any other Eastern European neighboring state, will bring heavy costs to its economy. Russia will find itself increasingly isolated by its own actions.”
Kyiv has praised the decision. Returning from two days of diplomatic talks in Washington, D.C., Foreign Minister Pavlo Klimkin said he had a clear message that the U.S. and the EU now speak with one voice regarding the situation in Ukraine.
Both Washington and Brussels moved beyond the measures introduced by the U.S. on July 16, a day before a Malaysia Airlines passenger jet was shot down over eastern Ukraine, killing almost 300 people. The disaster, which the West blames on Russia, was the catalyst for a hardening of the EU’s position towards the Kremlin.
However, the sanctions are limited. They exclude Russia’s natural gas sector, measures against which would be problematic for European states dependent on the supply of Russian gas, such as Germany.
The EU’s decision to increase the costs on Moscow is particularly significant given that it does ten times more trade with Russia than the U.S. does.
“Russia still has the opportunity to choose the path of de-escalation, which would lead to the removal of these sanctions. If it does not do so, however, we remain ready to further intensify the costs of its adverse actions,” read a joint statement by the leaders of seven advanced economies known as G7.
Russia’s financial, energy and defense sectors targeted
The most significant EU measure effectively blocks Russian state-owned banks from transactions in Europe. EU markets will no longer accept stocks and bonds issued by the institutions, and European citizens and firms will be unable to buy Russian securities with a maturity of more than 90 days.
In 2013, Russian state-owned banks issued $7.5 billion of bonds in European markets, accounting for 47 percent of the total bonds they issued during that period. Russia is likely to appeal for financial assistance from China, but the new restrictions will have an effect on the country’s borrowing costs. The U.S. has imposed parallel measures against oil giant Rosneft and three major Russian banks.
The second major element of the package is an arms embargo to and from Russia, covering all items included on the EU’s common military list. The ban also covers “dual use” goods, technology that can be used for both civilian and military purposes. This includes chemicals that can be used in the production of biological weapons and satellite navigation systems.
With its €20 billion arms industry, Russia will feel the effects of the arms embargo far more than Europe. Each year Moscow sells weapons worth more than €3 million to the EU, while the EU’s arms sales to Russia amount to around €300 million.
Dual-use technology exports from the EU to Russia were worth around €20 billion in 2013. However, only a “fraction of that” will be affected as the bulk of those exports is for civilian purposes, the AP cites EU officials in Brussels as saying.
Sanctions against Russia’s energy industry are limited to a ban on exports of equipment used in shale oil exploration as well as Arctic and deep sea drilling. Valued at some €150 million, these exports account for around one tenth of the total sales of energy technology to Russia. Analysts expect the ban to stall Russia’s efforts to develop its oil industry.
In addition, the EU added 11 further names to its list of individuals and companies targeted with asset freezes and visa bans, and announced that five state-owned banks will also be included when the full list is published. This will bring the total to 95 individuals and 23 entities.
Loopholes and repercussions
The new package falls short of full-blown sectoral sanctions. Notable in its absence from the U.S. package is Russia’s largest lender Sberbank, although it is expected to be on the full EU list released on July 31.
According to the Wall Street Journal, while several major banks will be prevented from raising capital on European markets, their European subsidiaries will be exempted from the sanctions. The combined assets of these subsidiaries at the end of 2013 amounted to over €20 billion, the Wall Street Journal reports.
The EU restricted measures to Russia’s oil exploration sector. The decision not to target the entire industry will protect member states reliant on Russian gas from retaliatory measures by Moscow.
Furthermore, its arms embargo is not retroactive and paves the way for France to complete its $1.6 billion sale of two Mistral helicopter-carriers to Russia. However, in an apparent concession to EU states critical of the deal, President Francois Hollande announced on July 22 that sale of the second warship will be placed on hold pending further developments in Ukraine.
Russia will not be alone in suffering the consequences of the punitive measures. States economically dependent on Russia, such as Germany, will suffer a drop in trade, although Berlin has said it is ready to make the sacrifice if it leads to a peaceful resolution to the Ukrainian crisis in the long term.
The United Kingdom is also likely to feel the effects. London is a major hub for Russian capital, and limiting access for Russian banks and businesses will lead to a loss in revenue for the city, although it is unclear what the scale of this loss will be.
Russia’s response
Moscow has furthermore moved to impose its own restrictions on trade with the EU. From Aug. 1, most fruit and vegetable imports from Poland will be stopped, Interfax cited government sources as saying. In addition, Russia’s consumer watchdog Rospotrebnadzor announced on July 31 a ban on Ukrainian juice imports, citing protection of consumers’ rights.
The restrictions are only the latest in a series of Russian bans on food products from countries in Central and Eastern European, with Ukraine traditionally bearing the brunt of such measures. Moscow has consistently denied claims by the affected states that such moves are political, often citing spurious food safety grounds as the reason.
In February 2012, several Ukrainian companies producing cheese were banned from exporting to Russia. Production of chocolate by Roshen, a company owned by Ukraine’s President Petro Poroshenko, has also been prohibited in Russia. This year alone Russia has banned imports of beef from Australia, pork from Latvia and Lithuania, and fruit from Moldova.
Moscow has been defiant in its response to the latest EU and U.S. measures, warning of higher energy prices for the European Union. In a statement, Russia’s Foreign Ministry said the European Union “has spoken with Washington’s voice, having practically discarded basic European values.”
It also claimed Russia will overcome all difficulties caused by the measures and only acquire greater economic independence.
“In contrast to Kyiv, which recently saw [its own EU arms embargo] reversed, Russia is not participating in the armed conflict in Ukraine,” it added. Russia has consistently denied Kyiv’s claims that it is arming pro-Russian insurgents in eastern Ukraine.
Kyiv Post staff writer Matthew Luxmoore can be reached at [email protected] and on Twitter at @mjluxmoore.
