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Tuesday, March 18, 2014

The EU, Russia and the Ukraine crisis: What are the limits of Europe?

Following a speech to both Houses of the Russian Parliament this morning, Vladimir Putin has signed a Treaty that will see Crimea and City of Sevastopol joining the Russian Federation. Western leaders have warned the move would have “additional and far-reaching consequences”, on top of the targeted sanctions agreed by EU foreign ministers on 21 Russian and Ukrainian individuals yesterday.

What could these additional measures involve? And how far can the EU go? We have just published a new briefing addressing these questions. We have looked at what tools the EU has available to force Russia to back down in Crimea, including the effectiveness of the various sanctions it could deploy.

Our assessment is that, in the short term, the most effective economic measures could be a combination of targeted sanctions on individuals and business interests and potentially limiting sales to Russia of products on which they are externally reliant – such as machinery, chemicals and medical products. While Moscow can employ rogue tactics in the short-term which Europe can’t match, in any prolonged economic stand-off, the odds are in the EU’s favour.

You can read our new briefing here. These are our key findings:
  • Additional targeted individual sanctions or a potential arms embargo, would be hard to agree amongst the EU’s 28 member states and their impact remains unclear, though there may be some scope for a group of EU states to move ahead with some additional sanctions if it’s not possible to get agreement at the level of all 28. 
  • Still, cleverly targeted sanctions on individuals and business interests could hurt Russia. Between 2008 and 2013, $421bn worth of private sector money – equivalent to 20% of Russian GDP – has flown out of the country, while Russia’s Net International Investment Position (NIIP) remains strongly positive. This suggests that there are sizeable amounts of Russian money invested abroad on which sanctions could be imposed, causing significant problems for high-ranking individuals and businesses. That said, the routing of this money through offshore centres makes it very difficult to track (click on the graphs to enlarge).
  • Therefore, the most effective economic measures could be a combination of targeted sanctions on influential individuals close to the top of the regime, business interests, specific firms wielding power in Ukraine (such as Gazprom) and potentially limiting sales to Russia of products on which they are externally reliant – such as machinery, chemicals and medical products (click on the graphs to enlarge). 
  • Sweeping energy sanctions would hit Russia the hardest but due to the EU’s dependence on Russian gas – in some countries as much as 100% of gas imports are Russian – this option is politically unlikely and could prove prohibitively expensive for the EU. 
  • Such decisions should not be taken lightly and Russia has an array of retaliatory options, including leveraging energy market power to secure favourable bilateral deals with other countries, applying tit-for-tat sanctions or, in extremis, wielding its hard power. 
  • However, whilst Moscow can use such rogue tactics in the short-term, which the EU, for various reasons can’t, in any prolonged stand-off the odds favour the EU, due to Russia’s disastrous demographic trends and relatively undiversified economy. For all these reasons, a negotiated settlement still remains the most likely option. 
  • Fundamentally, while this is a conflict driven by Moscow, it illustrates the EU’s “all or nothing” approach to its neighbourhood is no longer viable in the 21st Century. If the EU is to extend its influence further, it must be prepared to offer an alternative model of enlargement or association, lowering the political hurdles on the path to Europe. 
Follow us on Twitter @OpenEurope for all the latest updates on the Ukraine crisis.


Oona Houlihan said...

"... limiting sales to Russia of products on which they are externally reliant ..." - the problem here is twofold: a) the EU may not be the only region that can deliver said products - then Russia still gets them (maybe at a slightly higher price) and the EU loses out. b) Russia has a lot of goods to sell the EU on which the EU is "externally reliant" (I'm sure gas is only one of them). While concerning gas one may argue that there are contracts binding Russia or Gazprom that could not be overridden by sanctions (one would have to know the fine print here), I'm sure there are also contracts that EU sanctions could not breach. Anyhow, I'm unsure if there is such thing as "intelligent sanctions" when, imho, the EU politics in the runup to the crisis were rather weak. Intelligence should have been proven up front and also it seems that Western intelligence (here's that word again ...) services have once again misread the situation.

Denis Cooper said...

"... while this is a conflict driven by Moscow ..."

I don't see it that way; I see it more as action and reaction.

The action being the persistent efforts of the EU/NATO/US troika to extend the territory under its control in a direction that very obviously threatens Russia with a southern encirclement, and the reaction being Russia's refusal to be so encircled.

Look at the map and ask yourself how a British Prime Minister could travel beyond the Black Sea and beyond the Caspian Sea to Astana in Kazakhstan, 1200 miles east of Stalingrad where the Russians stopped the German Drang nach Osten in the winter of 1942 - 3, beyond the line of the Urals which are held to be the division between the European and Asiatic parts of Russia, and announce that he wants the EU to stretch from the Atlantic to the said Urals, so that it would butt up against China for God's sake, and not think that the Russians might find this a little threatening and provocative?

Here, last July:


"EU should extend further into former Soviet Union, says David Cameron"

"Speaking in Kazakhstan, British PM says European Union should stretch from the Atlantic to the Urals"

Do you think he actually wanted to start a war?

dave/r said...

Fundamentally, while this is a conflict driven by Moscow

i think if you look at the truth it was the usa and the eu witch has caused all this

Anonymous said...

The EU is helpless.
I am really curious how would the European socialists react to a negative GDP growth and rising energy prices while most Russians remember much more modest times and can adjust more easily.
The EU is barely holding together thanks to a non-elected government. What makes you think it can outlive a government which has popular support and huge natural resources?

Anonymous said...

So the UK has offered fighter jets to patrol the EU/Russia borders. Will the EU be using their illegal secret drones too?

This is yet another war that we are about to get involved in that has nothing to do with us.

Next steps are for the EU to suggest (read issue another Directive) for an EU army and air force under their command.
The EU's unelected senior bureaucrats started this and must finish it alone.

Cameron - stop trying to curry favour in Europe and go put these idiot EU bureaucrats on the front line.

It is a shame that it was not one of them that was shot yesterday.


Jesper said...

The old classic strategy: A blockade but in the modern form?

It might be interesting to study what is needed for successful blockades.

The rewards for individuals breaking/circumventing a blockade can be very rich indeed. The possible rewards makes it interesting for people that love money.
Since the rewards are so huge, it was in the past necessary to match the reward with a similar risk. I doubt that we in the modern world can match the reward with sufficient risk.

Millions to be gained versus risking a slap on the wrist?

I've got a guess how efficient the sanctions/blockade will be.

Rik said...

I wouldnot be surprised that Putin has a list of Russia's strategic commodities.
Stuff that is essential for industrial production, short term irreplacable but has a very low value compared to the final product. Easy to play: first assure no alternatives are on the market and ...... . Advantage is that it will hit some large EU companies hard, very hard.

Same with the Iran scenario. Simply start the process of supplying missile defence shield.
Makes military strike before actual delivery necessary. Which will create a huge mess in the ME.
Oil plus energy up. Horrible for European economies. Russia will at least offset the worldeconomy tanking by higher exportprices (a socalled win-win).

The only thing we see is a bunch of intellectual children on the Western side who partly or wholly have lost the overview. And some of them simply by personal irritation or simple stupidity might run into a new cold war.
One that are both the EU and the US are unable to afford. Cold wars require hardware and hardware is expensive.
Russia cannot afford it as well of course. However as the population there has a lot more testis and Ausdauer coldwar policies there can run much longer than in the spoilt West (where the motto is a day without a new iPhone is a day not lived). The only wars the West have fought in most of its people's lifetimes are ones that hardly did affect the standard way of life and standards of living. Unlike real wars where rsources have to be movede from iPhones to cannons. You cannot with a withdrawing US have a coldwar with Russia without moving spending towards military hardware. The EU simply would at best be in a permanent recession.

Anyway winning something means being better off than before/without that win. Winning doesnot mean being kicked one time less in your scrotum as the guy on the other side.

The danger in the West is that they simply donot have a clue (at least a lot of them).
Putin's reactions were high probability to near certaintity all the way. Their own basically driven by make believe and hope.
On top of that the guy that is supposed to lead the Western pack, hasnot got one important call on international policies right. And is perceived by the other side of the table (not only Russia but in a much wider sense) as weak, incompetent and a pussy.

The danger is that the West by getting frustrated basically over their own incompetence gets p!$$ed off and does some irrational things. Pure out of frustration.
They simply donot only look not in control of the situation but also of their own emotions.
Putin is acting completely rational (also in dealing with the local (Russia and former Sovjet states emotions) the West simply isnot.

On top of that the Western leadership seem to miss completely that large parts of their own population are simply not buying the BS presented to them. Just look at any media that has an opportunity of comments. From left to right all over the board a majority of the reactions are very critical against the West policies. Simply a huge PR disaster. There is no platform for this. The longer it would take the more fall out there would be on top of that. Which will as history show be mainly negative while the little bit of stomach with the own population will further decile (also standard procedure). So already a PR disaster locally but one that only has one trend and that is getting further South.

Fortunately Putin hardly takes this seriously. However the more you dig yourself in further the more it complicates a solution. Not only in relation to Putin's Russia, but also for the homefront. Western politics is hardly needing another credibility eroding event.

Ray said...

The EU has proved beyond doubt that it has little or no regard for it's own citizens, how can we seriously exêct it to care about the situation of the Ukrainians. Merkel and co will demonstrate very clearly in the upcoming weeks that they have one thing on their mind and one thing only, preventing anything that stops the flow of money and gas from Russia. They will renege on Ukraine because the Ukraine is going to cost them money. They will sell it to Russia.