The revival of what appear to be Russian-orchestrated separatist movements in eastern Ukraine on April 6 has renewed interest in applying tougher sanctions on Russian businesses.
On April 7, White House Press Secretary Jay Carney warned that “if Russia moves into eastern Ukraine, either overtly or covertly, this would be a very serious escalation,” saying that the U.S. is “prepared to impose further sanctions on sectors of the Russian economy should the situation escalate,” according to Reuters. Thus far, U.S. and EU have levied sanctions against top Russian officials, but have stopped short of targeting Russian corporations.
In addition to calling for sanctions against Russian companies, some Western leaders have suggested that American companies should halt operations in Russia.
In an interview with Bloomberg television on March 28, U.S. Senator John McCain, (Republican-Arizona) said that American companies operating in Russia like Pepsi, General Electric, Exxon Mobil, and Ford should pull out of Russia, or at least consider the “suspension of business.”
However, there is no reason to believe these companies will do so unless harder economic sanctions against Russia are introduced by international authorities or a strong coalition of Western governments acting in unison.
German Vice Chancellor Sigmar Gabriel criticized Joe Kaeser, the CEO of Siemens, which sells trains to Russian Railways, for meeting with Russian President Vladimir Putin in March. According to Bloomberg, Gabriel called the meeting “a bit off-key” in light of the ongoing tension between Germany and Russia.
Some companies have taken sanctions into their own hands.
On April 8, Volvo, a Swedish company, put on hold a joint venture with Russia state-owned company Uralvagonzavod to build armored infantry fighting vehicles. Although Swedish political leaders have not publicly encouraged Volvo or other Swedish companies to suspend cooperation with Russian companies, Agence France-Presse has suggested that Stockholm would veto a deal between Volvo and Uralvagonzavod.
Despite pressure from political leaders, some foreign companies have been reluctant to cease cooperation with Russian corporations. In particular, European energy companies have resisted pressure to suspend work on oil and natural gas development and transportation with Gazprom, a Russian state-controlled energy corporation.
Energy development and transportation between the EU and Russia is important to both economies. Thirty percent of European gas came from Russia in 2013 and eighty percent of Gazprom exports go to Ukraine and the EU. This makes European companies reluctant to suspend cooperation with Russia as they have their own market interests and expect high returns on the investments in joint projects.
Foreign energy giants ENI of Italy, EDF of France, Wintershall of Germany, and Germany engineering company Siemens are currently working with Gazprom on the construction of the South Stream gas pipeline worth $73 billion, which will run under the Black Sea from Russia to Bulgaria and other parts of Europe.
The pipeline will be crucial in maintaining Russia’s 30 percent share in the European gas market. According to Chris Weafer, a Senior Analyst at Macro Advisory Ltd. in Moscow, sanctioning Gazprom “would be the nuclear option if that meant actually blocking all of the Russian gas exports to Europe.”
Still, Weafer told the Kyiv Post that the EU could employ targeted sanctions, focusing on Gazprom’s monopoly on supply of gas to Europe and the ‘take-or-pay’ contracts it uses to corner countries on the continent: “Brussels could take a much tougher line on those issues…and impose heavy financial penalties and block the South Stream pipeline.”
To make up for the postponement of the South Stream pipeline, Weafer says Europe could “engage with Iran immediately and source that gas via Azerbaijan, Georgia, and across the Black Sea,” though the cost of such an investment would be enormous.
The European companies involved with the construction of the South Stream vehemently oppose sanctions against Gazprom. According to the transcript of a press conference in March obtained by the Kyiv Post, from Wintershall representatives, Wintershall CEO Rainer Seele said, “Nobody is helped by economic sanctions. They would hit not just Russia but also Germany and the whole of Europe in economic terms. The current situation cannot be viewed in black and white terms.”
Speaking to the Kyiv Post, a representative from ENI reiterated CEO Paolo Scaroni’s statement that financial, not political, interests would dictate his company’s investments in Russia: “the South Stream project has commercial rational even if tensions between EU and Russia might represent an obstacle to its realization. Nothing more, nothing less.”
Alternatively, the EU could begin development of continental reserves of shale gas to make Europe more energy secure and less dependent on Russian supplies. The environmental fallout of the extraction of shale gas in the U.S., however, may deter development in Europe. Moreover, the U.S. reportedly could provide only 70 billion cubic meters of gas by 2020 while the EU’s needs stand at 540 billion cubic meters annually.
Receiving liquefied natural gas from Qatar may be another diversification option. Countries in North Africa may also be able to provide oil to Europe, though they have been unreliable providers thus far, beset by terrorist threats and other unrest.
Kyiv Post Staff Writer Isaac Webb can be reached on Twitter @isaacdwebb or at [email protected]
