Bursting the Bubble

Economic sanctions against Russia: What to expect next?

16 December 2015 | by

This week is likely to be crucial for the extension of EU economic sanctions against Russia. The issue will be discussed by Heads of State during the European Council on Thursday and Friday. Sanctions are due to expire in January 2016 and an extension of six months, waiting for the Minsk Agreements to be fulfilled, is the most likely outcome. However, recent events such as the agreement between France and Russia for further cooperation in Syria are making some countries willing to lift the sanctions as recognition of the good will of Russia agreeing to fight ISIL.

What is the current state of relations?

Diplomatic measures started taking place from March 2014 while economic sanctions did so in July, after the Malaysia Airlines flight MH17 incident. The main aim was to give a response to Russia’s annexation of Crimea and unwillingness to commit to a cease-fire in Ukraine. Sanctions apply to exports of military equipment, as well as to a series of oil industry technologies. Furthermore, Russian state banks are no longer allowed to raise long-term loans in the EU. The gas industry, the main Russian exporter towards Europe, is excluded from the sanctions. Restrictions of trade are to be found also in Crimea, since the EU strongly opposes the recognition of the annexation of the territory by Russia.  Russia has responded to these sanctions by banning imports from Europe, mostly those coming from the food and agricultural markets.

In September 2014, the first Minsk Protocol, aiming to implement an immediate cease fire in the Donbass region of Ukraine was signed by Ukraine, Russia, the Donetsk People’s Republic and the Lugansk People’s Republic; but it soon collapsed failing to reach its aim. A second agreement (also known as Minsk II) was then signed in February 2015 by Ukraine, Russia, France and Germany. Although this second agreement has not yet achieved its objective of a complete ceasefire, the current official position – if there was to be one – of the European Union is that sanctions will be lifted only if the agreements are respected by Russia (as stated by Manuel Valls, among others). Meanwhile, Russia keeps complaining about Kiev’s position, accusing the Ukrainian government of its unwillingness to fulfill their side of the agreements.

How are the sanctions affecting Russia and Europe?

According to the IMF, Russia’s economy is being strongly affected by the difficulties of accessing foreign financing, which is hurting investment and could lead the country to ‘a cumulative output loss over the medium term of up to 9% of GDP’. A Briefing from the European Parliament signals that the EU market stands for 48% of total Russian foreign trade, placing Europe as Russia’s first trade partner. This, however, wouldn’t necessarily be such a big problem for Russia, given the fact that gas imports are not affected by the sanctions. The main problem for the Russian economy lies on the fact that, according to the same report, up to 75% of foreign investment in Russia comes from the EU, and that it is being strongly limited by the sanctions.

European producers are also suffering the effects from the block on their exports, mostly concerning agricultural goods and the food market – the most affected products being fruit, vegetables and meat. The European Parliament estimates that the overall effect of sanctions and counter-sanctions as -0.3% of the EU’s GDP in 2014 and -0.4% in 2015. For some, the threat does not lie on these temporary turndowns for the European economy, but on the possibility that Russia will strengthen its relations with third countries such as China, who could eventually replace European exports to Russia over the long term. For instance, the two countries have recently agreed to design a high-speed railway between Moscow and Kazan, which will certainly enhance trade. However, the solution for Russia’s investment problems doesn’t seem to lie on China: Chinese banks are apparently being ‘very scrupulous and careful in dealing with their Russian counterparts under the sanctions regime’, as reported by The Diplomat.

Recent Events 

An agreement had apparently been reached during the G20 summit in Ankara among European leaders for a six-month extension of the sanctions. However, that happened before President Hollande agreed with Putin to exchange information in Syria, as well as not to fight any forces acting against the ISIL. This agreement has encouraged the view that Europe should take a step forward and lift the sanctions. Germany, first Russian trade partner in Europe and highly dependent on the country’s gas, is reluctant to continue with the ban (Germany’s Foreign Minister has also asked for admitting Russia back in the G8). Italy, another country who needs Russian gas, decided on Wednesday 9 November not to close an agreement for the extension, delaying the decision.

On the other hand, Baltic and Central European countries are reluctant to exchange collaboration in the Middle East for the situation in Ukraine. The United Kingdom is supportive of this position, probably because of its close relation with the United States. Some of these countries, notably Poland, Slovakia, Hungary, Latvia, Lithuania, Estonia and Romania are opposing the doubling of capacity of the Nord Stream gas conduct from Russia to Germany, accusing Germany of betrayal and stating that this will de-stabilize Ukraine.

Which will be the final outcome of the European Council concerning this issue? The official position being that the Minsk Agreements need to be fulfilled before lifting the sanctions, and with pre-agreements having been made about a 6-month extension, this is likely to happen. However, some countries will probably make it quite clear that the ban will not go beyond June 2016, and diplomatic relations are likely to keep growing stronger.

2 Comments

  1. The article is rather correct but it is also biased. German foreign minister has suggested that Russia could be accepted again in G-8 (like the latter cares about it) if it first fulfills the conditions: http://www.reuters.com/article/ukraine-crisis-g7-steinmeier-idUSB4N0VX00B20150415 (Quoting Sputnik or Russia Today is not very credible as both are owned by the Russian state and used as instruments of Russian propaganda to the West) and not that we want Russia back,as this article makes it sound, also Germany’s dependence on Russian gas can not be marked as ‘high’ with 30-something percent in contrast to Slovakia, Bulgaria, Finland or Estonia which are 100% or nearly 100% dependent on Russian gas imports. Not to mention the share of gas in the German energy mix which is around 10% of all the energy that Germany uses: http://www.germanenergyblog.de/?p=17640

  2. Ariane Aumaitre

    Alex,

    Thank you for your comment. I thought that the fact that Germany was pushing for the fulfillment of Minsk was implicit during the article (although it is one of the countries apparently more interested on relauching economic relations).
    I speak about Germany’s dependence on Russia’s gas and not about the others because the countries you mention, in spite of being dependent are not very keen on the lifting of the sanctions, and that’s what I wanted to make clear. It seems to me that Europe does have a strong dependence on Russia’s gas anyway https://ec.europa.eu/energy/en/topics/imports-and-secure-supplies/supplier-countries
    My point was not as much to make it seem that Germany is all-in for having Putin back, but to point to the fact that some countries are reticent to keep the situation like this.

What do you think?