The revival of destabilizing, Kremlin-backed separatist movements in eastern Ukraine on April 6 has spurred talk in the West about tougher sanctions to deter Russian aggression and a possible military invasion of eastern Ukraine.
However, many Western governments – and their businesses – are still
adopting a business-as-usual attitude towards commercial relationships
with Russia, much to the chagrin of Ukrainians who regard such ties as
trading with the enemy.
The debate over whether to maintain or cut economic ties with Russia, at the very least, is heating up.
Germany
Germany, the economic powerhouse of the European Union, is a case in point.
At the end of March, German Vice Chancellor Sigmar Gabriel mildly criticized Joe Kaeser, the CEO of Siemens, Germany’s largest engineering company, for making long-term commitments to Russia during a meeting with Russian President Vladimir Putin. Gabriel called the meeting “a bit off-key” in light of the ongoing tension between Germany and Russia.
Kaeser has not responded to Gabriel’s remarks and Siemens has not backed away from its highly profitable Russian investments: in the 2013 fiscal year, Siemens’ sales to Russian customers totaled about $3 billion.
On April 8, Andreas Shockenhoff of German Chancellor Angela Merkel’s Social Democrat Party criticized Foreign Minister Frank-Walter Steinmeier’s emphasis on cooperation with Moscow and his suggestion that the EU is forcing Ukraine and other countries in Eastern Europe to choose between East and West.
Former German Chancellor Gerhard Schroeder reportedly did not invite Putin to his 70th birthday party, possibly because Merkel sharply condemned his defense of the Russian invasion of Crimea. Schroeder, a friend of Putin’s, is paid 250,000 euros a year to serve as board chairman of Nord Stream, a pipeline joint venture with Russian gas monopoly Gazprom.
United Kingdom
Meanwhile, the British government has
said that it will not interfere with British companies’ activities in
Russia. London has been heavily criticized for serving as the banking
capital of money launderers, including Russian oligarchs.
Despite
saying on April 9 at a press conference in Kyiv that there would be “serious costs and consequences to
Russia’s actions,” British Ambassador to Ukraine Simon Smith also noted that
the British government’s “underlying philosophy” would not allow it to
prevent British companies from doing business in Russia.
“Ours is
not a government that that puts pressure on companies to take commercial
decisions. We have a tradition of working with our companies in a way,
which says ‘the commercial decisions are for you to take,’” Smith said.
He
suggested that trade between Russia and the United Kingdom might help
dissolve political barriers: “There is quite a powerful conviction that
successful trade investment is actually one of the ways in which you can
get over the barriers to understanding.”
France
With no signals coming from Paris, French companies have continued to deepen cooperation with Russian corporations. Carlos Ghosn, the Chairman and CEO of the Renault-Nissan Alliance, said last week that the current crisis would not derail the company’s Russian ventures: “We have absolutely no hesitation on the potential of the Russian market, no matter how many bumps that you have in the road.”
Renault-Nissan has partnered with AvtoVAZ in Russia, producing a combined 1.1 million vehicles per year at three sites. The three companies currently have a 32 percent share in the Russian market, but Ghosn has said they are setting their sights on controlling 40 percent of the market by 2016.
Renault is not the only French company continuing to develop investments in Russia: on April 4, aerospace company Arianespace signed a contract to provide Soyuz carrier rockets to the Russian space agency Roscosmos.
Recently, the most governmental rebuke of Russian aggression has come from Amsterdam. On April 9, the Netherlands announced that it had postponed a trade mission to Russia, citing the annexation of Crimea.
Some cut ties to Russia
However, some European companies are cutting ties on their own with Russia.
On April 8 Volvo, a Swedish company, put on hold a joint venture with Russia state-owned tank manufacturer Uralvagonzavod to build armored infantry fighting vehicles.
Though Swedish political leaders have not publically 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.
America
Across the pond, American political leaders have argued that American companies should suspend cooperation with Russian corporations in light of the ongoing crisis in Ukraine.
In an interview with Bloomberg Television on March 28, American Senator John McCain (Republican-Arizona) said that American companies operating in Russia like Pepsi Co., General Electric, Exxon Mobile, and Ford should pull out of Russia, or at least consider the “suspension of business.”
NASA announced on April 2 that it had suspended contact with officials from Roscosmos, though it said the two agencies would continue collaboration on the International Space Station.
U.S. Senator Dan Coats (Republican – Indiana) has proposed sanctioning Rosoboronexport, Russia’s agency responsible for the export of arms. Coats’ amendment to a bill providing aid to Ukraine could also affect American companies hoping to do business with Rosoboronexport: the amendment prohibits “contracts with any domestic or foreign company that cooperates with Rosoboronexport to design, manufacture, or sell military equipment.” According to Radio Free Europe, the Pentagon has contracted with Rosoboronexport for more than $1 billion worth of military aircraft since 2011, largely for deployment in Afghanistan.
Energy giants cling to Gazprom
European energy companies have been particularly resistant to pressure to suspend work on oil and natural gas development and transportation with Gazprom.
Energy development and transportation between the EU and Russia is important to both economies. Thirty percent of European gas comes from Russia 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 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.
The companies involved with the construction of the South Stream vehemently oppose sanctions against Gazprom.
Wintershall CEO Rainer Seele said in a March press conference transcript obtained by the Kyiv Post, “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 rationale even if tensions between EU and Russia might represent an obstacle to its realization. Nothing more, nothing less.”
With most EU countries unwilling to inhibit European companies’ business in Russia, sanctioning Russian corporations may prove to be the most effective means of deterring Moscow’s aggression.
Such sanctions would have significant costs, however.
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 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.
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.
American shale gas does not seem to be the solution to the European energy crisis: 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]
