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Friday, November 14, 2014

As the Ukrainian ceasefire falters what next on sanctions?

UK PM Cameron warns Russia of sanctions ahead of G20
Over the past few days we have seen the situation in Ukraine begin to escalate once again. Both NATO and the Organisation of Security and Co-operation in Europe (OSCE) have said that they have witnessed significant military movements in Eastern Ukraine, most likely from Russian troops. By almost all accounts the ceasefire only continues to exist on paper (although we have pointed out before why both sides might be willing to continue to pretend it is more than that).

Why has the situation suddenly escalated?
In all honesty, it’s not entirely clear how significantly the situation has escalated on the ground in Ukraine, given that there have been continuous reports of fighting since the ceasefire was struck. It could be more a case of attention shifting back to Ukraine ahead of the G20 and EU meetings. That said, Russia continues to push the boundaries with military exercises. Furthermore, the elections (both in Ukraine and the separatist regions) have increased tensions, while Russia is reportedly keen to help further establish the newly elected separatist leaders.

As might be expected, these reports have once again triggered the discussion on whether the US and EU should increase sanctions on Russia. As we reported in our press summary today, numerous leaders have come out warning of the potential increase in sanctions – surprisingly this also includes representatives of Hungary and Slovakia, though both countries remain a bit divided on sanctions.

While there is lots of talk of further sanctions we would not get ahead of ourselves. Crucially, German Chancellor Angela Merkel has already played down the chance of this in the near future as we reported in our press summary earlier in the week. EU officials have also suggested any agreement is unlikely at Monday’s meeting of EU foreign ministers, although a discussion will be had at the meeting of EU leaders in mid-December.

What could be on the table if sanctions are escalated?

We’ve discussed many times before the options for sanctions but below are a reminder of the potential options if they wanted to take the next step up from the current sanctions.
Expanding list of individuals subject to asset freezes and travel bans: This is a virtual certainty and should be agreed at Monday’s meeting. Specifically the newly elected officials for the pro-Russian separatists will be targeted. More broadly, those involved with the elections in the region could be targeted. It’s not yet clear if there will be a broader discussion about adding further people or oligarchs close to Russian President Vladimir Putin to the list (we have pointed out the potential legal concerns on these sorts of sanctions here).
There are a few other options which the EU could consider (many of which we have discussed before):
  • Ban purchases of new Russian sovereign debt – this was reportedly toyed with before but considered too harsh a step. As we noted before, this would probably be manageable for Russia given its fairly low government debt level but it would add another difficulty at a time when the economy and state budget is coming under severe pressure.
  • Broaden scope of technological sanctions – this would involve expanding the list of banned tech exports to Russia, currently very focused on oil exploration. It could also include expanding the ban of services which European firms can provide to Russia, which again is currently focused on oil exploration.
  • Extend financial sanctions – similar to the above, this would involve broadening the existing financial sanctions from just state owned firms to Russian firms more generally, most likely still only in specific sectors such as financial and defence. This would be legally difficult since the ties to the state would become even more indirect and justification would need to be watertight.
  • Broaden scope of financial sanctions – related to the above, rather than expanding the number or type of firms subject to the sanctions, the EU could broaden the scope of the sanctions. This could, for example, mean cutting off all euro funding from certain state owned firms, no matter what the maturity or the type of loan (there are probably a few incremental steps or variations between this and where we are now).
  • Remove Russia from the SWIFT system – This remains very unlikely and for some very practical reasons. SWIFT is independent and private. Removing Russian financial firms from this system would mean having heavy direct sanctions on them which forces SWIFT (in acts of compliance) to shut them off from the system. This is one of the key reasons it has never really been discussed at the top level as a realistic option so far.
For his part Putin continues to demand a removal of sanctions but if they were ramped up it is likely he would be willing to retaliate with his own sanctions, some of which we looked at here.

In terms of the broader picture it’s clear that sanctions, combined with the falling oil price, are hurting the Russian economy. However, they do not yet look to have impacted Putin’s approach or course of action. As we warned before, the lack of a clear goal or strategy for the sanctions as well as in terms of what Europe actually wants in terms of a future relationship with Ukraine and Russia could well hamper the approach. The EU would do well to discuss this, not least because the continuing downward spiral of the Ukrainian economy will likely (as we warned some months ago) lead to further bailout requests.


Rik said...

None of the 2 parties wants to stop this. Seperatist because after all that has happened see no basis left to live in peace with the West-Ukkies. Putin as destabilising the Ukraine goes exactly according plan. They are bust and have no grip on their finance. Plus he has a truckload of options left to avoid the West-Uks will win.
West-Ukkies as they think they can win this militarily. They cannot unless Russia wants that andit doesnot.
So basically this thing has a lot of potential for further escalation. Especially as the West responds in a very Pawlovian way (more fight, more sanctions).

One has to keep in mind that Putin likely will step up as well. And a lot more strategic than the West.
Sanctions that disproportionately hit one country and not the rest.
Basically that opens the question which countries. The European decisionmakers; easy targets; structural damage; hit an already poor working economy.
He has the advantage that he sells energy a product for which there are always buyers. While for a lot of the stuff Europe sells no alternatives are available.

Italian clothes when you kicjk them out others will step in and it is nearly impossible to turn that back lateron.
German cars (and destroy their sales infrastructure). Japan will very likely step in (simply as opportunity to good to be true). And it takes a decade or more to restore the damage done as a new infrastructure has to be built up.
Sanctions against specific countries iso against the EU. Putin is in no way obliged to to have sanctions against all.

The more the EU acts like an enemy the more Putin from a strategic pov will have to do more structural damage to the EU economies.

Countries like China and India (and a few others) will very likely start to hedge against some of the mainly financial sanctions. In case they for whatever reason become the next victum/target.
Effectively eroding both London's and NY's positionb as the 2 main financial centres probably for the benefit of the likes of S'Pore, Dubai and HKong.

This is a fight that the West should never have sponsored they only can lose. Pick battles you will win not ones that you will surely lose and subsequently react as a spoilt 4 year old.
Starting a new coldwar for a garbage bin like the Ukraine how stupid can you get.
There double down like the West is doing now on a bust while you know the other side will call your bluff is the most stupid strategy imaginable.

jon livesey said...

A key to strategic success is not to put effort into trying to get what you don't need, simply to deny it to someone else.

Some people don't want to hear this, but the Eastern strip of Ukraine has a high proportion of Russian speakers, and its economy is still quite heavily integrated into the Russian economy.

The EU blundered its way into a crisis over Ukraine, but that crisis was probably on the way.

We would be wise to stop making this into a contest of wills, where everyone's economy suffers, and instead challenge Russia to allow internationally supervised votes to find out what each region of Ukraine wants for its future.

Anonymous said...

Cameron is not known for sound judgment, he is playing follow my
leader after Merkel, it will cause
damage to the economy, but Dave will
not have to pay, and after it is all over, no one will say `thanks`

Jesper said...

What the EU wants with Ukraine?

Reduce corruption, improve governance?
-How has that worked out in Bulgaria, Romania etc?
-Maybe not enough time has passed so maybe we should look at other countries like: Greece, Spain etc?
-Maybe not enough time has passed with those countries so maybe we should look at Italy?

EUs history as a force for good government is at best sketchy. Turning Ukraine into a country that would be even close to meeting the Copenhagen criteria would take an Herculean effort, a lot of time and competent leadership.
But then again the ones running the show aren't the types to know anything about the lives of ordinary citizens or functioning of small businesses anywhere...
It seems unlikely that improving the life for Ukrainians was or is the goal or part of a strategy.

But if improving the life for Ukrainians isn't the goal or part of a long term strategy, then what could it possibly be?

Anyones guess really. However, it currently is an external enemy/distraction and incompetent, arrogant leaders love to have something else to blame for their own failures...

Doubtful which one will come first: Lives of citizens in the EU improving or the resolution of the Ukrainian situation.

christhai said...

The ridiculous "Mouse that Roared" EU created the Ukraine conflict in the first place.

The EU and no one else created the schism between West and East Ukraine.

If the EU had not meddled in the Ukraine so that Germany could get its hands on Ukrainian coal and shale oil - and a lot of cheap labour - Russia would not have had the excuse - given to them by the EU's dupes - to annex the Crimea.

So when we see the puffed up busybodies of the EU insulting the very dangerous character which is Putin, the Leader of Russia - nuclear tipped Russia - the EU is once again, in its incredible arrogance - playing their games which could result in World War 3.

Which would be the 3rd World War Germany started.

1. Let the EU apologise to Russia, the Ukraine and the World for destabilising the Ukraine and starting the Civil War.

2. Let the Swiss or Norwegians set up a Conference for cool heads to determine what can be done by the belligerents to heal the wounds caused by external forces - the EU and Russia.

Let those windbags (and moneybags) of the EU realise that Russia could occupy the whole of the Ukraine in a few hours.

Latvia, Estonia and Lithuania could fall to Russia in a single day.

The EU would scream for help to NATO - but wait - the EU didn't need NATO - because the EU claims to have kept the Peace itself for the past 69 years.

Britain - get yourself out of this appalling and criminal organisation - the EU.

Let David Cameron realise that he only sounds intelligent when he keeps his mouth firmly shut.

Rollo said...

We will see the annexation of Donets and Labansk pretty soon, and it will rapidly become a fait accompli, as has the Crimea.

Edward Spalton said...

One thing I notice about all the reports is that they contain no mention of what the Kiev forces are doing and whether they are receiving supplies of weapons, mercenaries or other reinforcements and material from the West. The silence is very eloquent.

This is so reminiscent of the unbalanced reporting of the Yugoslav situation in the run-up to the West's unprovoked attack of 1999 ( and their one-sided intrusion into Croatia and Bosnia before that - under the guise of peace keeping).

Anonymous said...

Isn't it time for the gullible Left to recognise that Putin alone is responsible for destabilising Ukraine - an independent, sovereign and weaker country? Putin is a bully who lives in a mad world of lies and disinformation. He lied repeatedly in denying that Russian special forces (Spetsnaz) were orchestrating the pro-Russian take-over in Crimea which led to the its annexation. He was complicit in supplying a BUK surface-to-air missile to pro-Russian separatists which resulted in the murder of 298 innocent civilians on flight MH17. He has continued to arm the separatists with heavy artillery and tanks (contrary to Minsk Agreement) and has repeatedly violated the borders of Ukraine (an act of war). The evidence is over-whelming that the majority of Ukrainians in the East want to live in peace and do not want to be part of Russia. Ukraine should be free to join any organisations it wishes to, and to determine its own future. Russia should get out of Ukraine now. It is not their country.

Average Englishman said...

More sanctions will cause Russia long term damage, so this tactic will only encourage Premier Putin to ensure that he has a short term fix to the problem. That means using his military to take over a conveniently shaped piece of Eastern Ukraine that will be sustainable as an effective part of Russia on a long term basis, as per the Crimea.

This is a potentially very dangerous option but he seems to be a man willing to act tough and take a few risks. The majority of people in Eastern Ukraine are of Russian origin and consider themselves part of the Russian block and Putin will not 'hang them out to dry' any more than Margaret Thatcher was prepared to leave the Falkland Islanders to be taken over by Argentina. I am not saying that Russia's claim to Eastern Ukraine is the same as Britain's to The Falklands, only that in 'realpolitik' terms the end result will be the same. If you poke a bear in the eye do not be surprised if it gets aggressive. Also, Putin's political survival (and probably physical survival too) depends upon being seen as a very tough guy who is not to be messed with. Think 'Ceasar' from ancient Rome or a mafia 'don' and you won't go far wrong.

The best that the EUSSR and the West as a whole can do is try to negotiate a sensible settlement using neutral third parties and as quickly as possible. There are still far too people on this planet with their fingers close to nuclear buttons that have as much sense as 'Dr Strangelove'.

What's the alternative? More escalation trying to turn Ukraine into another Afghanistan for Russia? Very dangerous and I think if the people of Western Ukraine step back and think about things for a while they will see that this would not exactly be a good solution for them either. It would be their people being used as cannon fodder in this proxy war between Russia and the West.

As for Dave, the least he says on the subject the better. He has already shown that his competence on foreign affairs matters is highly suspect to say the least; I mean, he did think that getting directly involved in the Syrian war would have been (and still could be) a good idea. And the UK foreign office's love of all things EUSSR will only pull him and us further into this very nasty Uktaine mess when it was started by others and needs to be finished by others. If he had any sense Dave would not have haranged Putin in Brisbaine (which only shows that he is a poodle of the White House and Merkel) but would have sympathised with Putin's position and tried to find some common ground that could be used as a starting point to end this madness.

War games should be just that: games and not played out for real with the lives of many innocent people at stake.

Rik said...

A crisis was always very likely however the West could have realised that never a sustainable integration into the EU/NATO network could be achieved.
Similar as Putin realises that getting the whole thing back into the Russian phere was not a realistic option.

What the West, especially the EU could have done is trying to prevent it would get so far as it is now and completely disstabilises the Ukraine. End up with a mess at its own borders and likely be the one that has to pick up large parts of the bill. The EU messed up everything. One of the most lousy bets in international affairs.

A point you completely miss is that this is from both sides in no way a democratic game. Putin at the end of the day couldnot care less if there are fair elections. He wants a buffer state and to send a clear message to the West: not more East.
West is hardly any better they supported unelected opposition against an elected president. Simply wanted to replace him not with decent folks, but simply with their own crooks. Couldnot care less about protection of minorities (when they are Russian). Basically want parliamentarian approval but how they would get that did hardly matter.
This will not end with elections and certainly no free and fair ones. Both parties always find a BS reason why elections are illegal, not fair, not free and therefor donot count, that is when the outcome is unwelcome. When it is welcome they were of course great.

This is pure power play with the EU getting deeper and deeper in it, without even remotely considering to do the things that might actually win this one. And Putin knowing that he is fighting with an organisation with no testis on top of that. They seem to have a great talent to bring themselves into unnecessary trouble and being unable to get themselves out of it.

BelgoBelg said...

The OE blog deals with the details of sanctions. The commentators take both sides--mostly the Russian--of the substance of a dispute that can be argued about ad nauseum.

For me, the essence of this all is that Pres. Putin has clearly indicated his willingness to redraw the boundaries of Europe by military means. His justifications for this--the protection of Russian minorities in Georgia, Crimea, the Donbass, and who knows where else--are exactly the same as those used by Hitler relating to protection of German minorities in Austria, Czechoslovakia and finally Poland in the late 1930s. Appeasing this Russian dictator will no more secure peace than did Neville Chamberlain after Munich.

Pres. Putin has reopened the cold war with the entire panoply of saber rattling, including reminding us of his nuclear weapons and resuming long range flights of nuclear bombers. The cold war is a fact again. Too bad. The west (EU, NATO, US) should call a halt now to any territorial expansion in Europe via military means.

In this writer's view, it is then necessary for the west to put a huge effort into obtaining a non-hydrocarbon energy source. Regardless of any environmental benefit (since that doesn't move the political needle at all), it would marginalize the economic and political importance of both Russia and the Arab countries, and end the largest capital transfer of human history.

Anonymous said...

The tone of your comment, though balanced, is still that we live in a world where the Russian problem can be carefully titrated. I think we need to be more brutally realistic. Russia is currently run autocratically by a rabid nationalist. He wouldn't be the first autocrat to subject his population to impoverishment in pursuit of his territorial goals. Sadly, the only realistic response is to stand up to Putin. This means pain, possibly severe, for western Europe. The peace dividend of the past 15 years will, regrettably, have to be given up as defences are rapidly strengthened. Gideon Rachman, in today's FT, says the current view in the West is that we are about 2-3 on the sanctions scale of 10. In other words, we have some way to go. And that is before Ukraine is supported by arms shipments. We can agree that we should proceed in a non-inflammatory manner, but proceed we must. As for a European reaction, remember that the UK is crucial for a credible defence position. It is only a matter of time before Juncker's position is progressively weakened by his association with tax avoidance, and the UK starts exacting a price for its military contributions. As for Mogherini, what a disaster. No-one Putin thinks he can get away with murder (both literally and metaphorically).

jon livesey said...

"A point you completely miss is that this is from both sides in no way a democratic game."

Rik, this appears to be entirely your own imagination. The Democracy or otherwise of the current actors is irrelevant here. There are interactions between state entities. How those state entities came to power isn't the issue. We know there were coups on both side. We read the newspapers, yes?

What I am talking about is where those interactions should be headed. I am suggesting that we stop talking about "integrity" of Ukraine, and instead allow an already divided country to find some stability by making the partition a legal fact.

Anonymous said...

Putin is a dictator and an accomplished liar. No one in Russia can confront him or oppose him without being arrested, imprisoned on fraudulent charges, or even assassinated (e.g: Litvinenko). He has total control over the state media in Russia and so it should not be any surprise that he can lie and deceive the people of Russia. Do they know there are Russian troops fighting in Ukraine? NATO and the West do not present a threat to Russia but Putin's popularity and political survival depends on claiming otherwise. Putin is the greatest danger to world peace since Hitler. Unfortunately Putin will only stop his infantile games until confronted by military force.

Anonymous said...

Jon Livesy….and after Putin divides up Ukraine, perhaps he could do the same in the Baltic states?Putin alone is using force to create his New Russia. He will only be stopped when confronted by force or the threat of force. Bullies only back down when confronted by superior force. Appeasement didn't work with Hitler. It won't work with Putin.

Rik said...

Sorry I messed you up with somebody else's remark.
Fully agree with your last remark, this makes the Ukraine even look more like a failed state. Recognising that will be only a first step but an essential one in the process to stabilise the situation.

Rik said...

This is an issue that quoting the great 20th century American Sammy Davis Jr: Don't roll the dice if you can't pay the price.
Not if Putin is a nice guy or not.
The issue is if you donot want to do what is necessary as the EU to make it work, you should have stayed out of this game and never actually pushed it.

Btw do you really think the EU did anybody a favour by showing here it has absolutely no testis and show that clearly to Russia?

And btw the Baltics could try to improve their relation with Russia. Russians are often seen as second class citizens. Simply not sustainable. And are/were clearly actively supporting the coup/impeachment, simply not too clever to do that with a very big neighbour.
Nice to have an EU to prevent wars between France and Germany, but not very clever to replace that for a warlike situation with Russia. The dangers of the latter are much bigger.

Messing up your foreign and energy policy and not having a proper plan B/alternative but windmills is simply complete moronic.

christhai said...

Just a couple of points in response.

Democratic Rules.

As some of you have pointed out, the EU and Russia are on par. There is no "high ground" for either of them.

The EU/Germany started the Ukrainian Civil War for GAIN.

Russia took the opportunity to take the Crimea 'to protect its citizens' from the EU's neo-nazi groups.

THAT was the point something could have been done.

But there was NO Democracy at work on either side.

When that Malaysian Airlines flight was shot down the EU blamed Russia and still does for God's sake.

The guy who pulled the trigger could have been Ukrainian or Russian.

Fact is - we don't know.

What IS clear especially since Frau Merkel's warlike speech to Russia is that she has ratcheted up the ante to bring us within a few clicks of nuclear war.

It is not worth wiping out millions of nice people (like me and mine) just to save face for the EU Commission and the German Foreign Office.

Stop it now.