EU ambassadors met yesterday to begin discussing the options and will meet again tomorrow in an attempt to finalise a package to send to EU leaders. They are expected to reach a decision by Friday.
Before we look at the options on the table, we should note that such agreement is not a forgone conclusion. As we have been pointed out repeatedly, there are significant divisions within the EU around sanctions. Slovakian Prime Minister Robert Fico recently even threatened to veto another round of sanctions if they hurt the Slovakian economy. In short, many EU leaders seem to be becoming increasingly anxious about the economic impact of sanctions and the inevitable Russian retaliation – just see the concern around the Russian ban on EU fruit and veg.
All that being said, with the UK, Germany and France seemingly in favour of further sanctions – and pressure on Italy’s Foreign Minister Federica Mogherini to take a hard line ahead of taking up the role of EU High Representative for Foreign Affairs – the big states seem largely to be backing further action and willing to take on a larger share of the economic burden.
With all that in mind, here are the options that are being touted:
- Expanding targeted sanctions: This looks a done deal with further entities and persons involved in Crimea and Eastern Ukraine being subject to asset freezes and travel bans. The focus has tended to be on smaller firms and regime members directly involved. The measures would have a larger impact if Europe decided to sanction a higher profile firm (such as a state-owned bank), or a big name oligarch with ties to the regime.
- Expanding stage three sanctions: This seems the most likely option, with extensions made to the existing sanctions on finance, defence and energy sectors. This could take many forms but the main ones under discussion are – expanding the restrictions on financing for state-owned banks to any maturity above 30 days (currently 90 days), and expanding the list of banned energy tech exports and dual use goods to Russia.
Other proposals under consideration include, banning a larger number of firms in these sectors from issuing debt in Europe and/or listing on European exchanges – initially this would be focused on state owned firms (of which there are many in Russia). The range in these sanctions remains large, so the impact is hard to judge. For the most part they will be focused on limiting medium to long term financing for state-owned firms. This will have a grinding impact on the economy, but as we have noted before, the Russian state does have resources at its disposal to aid firms hit by these measures.
- Banning syndicated loans to certain Russian entities: This remains a vague option, but could have a substantial impact since many Russian firms are reliant on external loans. For example, the private sector (excluding financial firms) have $142.5bn in outstanding external loans, a key source of financing for them. Given some European banks large exposure to Russia, any movement into this area of sanctions would likely be tentative and limited to very select entities (state-owned banks perhaps), under very specific terms.
- Ban on new purchases of Russian sovereign debt: this would see European entities banned from purchasing any newly-issued Russian sovereign debt. It would be quite a bold measure, and fears remain that Russia, a big investor in European sovereign debt, would retaliate in kind, something struggling eurozone countries would not want to see. In terms of impact, as the graphs above and below show, while Russia does have a sizeable amount of government debt to roll over in the coming year, the amount which is held externally is fairly limited. That said, this could well increase borrowing costs and reduce liquidity in Russia’s sovereign-debt market at a time when its economy is struggling and the state is being forced to take on an even larger role.
One option which doesn’t yet seem to be on the table is one which the UK has reportedly called for – banning Russia from the SWIFT network. This is not surprising, since it would be a big step and could almost amount to freezing out Russia’s financial sector from Europe – a move which the EU is clearly not ready or willing to make. We will analyse this in a future blog post.
One consideration that seems to be glaringly absent from these discussions is the consideration of how effective the sanctions have been so far. To be fair, Dutch Prime Minister Mark Rutte did call for such consideration ahead of last week’s EU summit. There are already reports of them having some economic impact (both on Russia and Europe), but clearly they have not caused a change in course or approach from Russia or in Eastern Ukraine. Europe would do well to consider why this is the case in order to fully judge and best optimise any future sanctions.
Furthermore, as we have noted countless times before, the end goal and medium to long term strategy of such sanctions and the wider approach to Russia and Ukraine remains unclear. Given that this crisis has already been going for 6 months, and shows little sign of abatin,g some longer term thinking would be welcome.