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Thursday, July 24, 2014

Leaked EU memo with options for 'Stage 3' sanctions on Russia highlights underlying confusion

France's Mistral warships seem to be off the table
As Greek daily To Vima and the FT have been reporting, there is a draft going around of the EU options paper on possible further sanctions on Russia that will be discussed at today’s meeting of EU ambassadors. The paper includes potential options for 'Stage 3' sanctions, and the key ones are:
  1. Restrictions on access to EU capital markets for Russian state-owned financial institutions
  2. Embargo on trade in arms
  3. Restrictions on exports of dual use goods
  4. Restrictions on exports of sensitive technologies including in the field of energy
We have seen a version of the document, and these are our initial thoughts:
  • The section on capital markets is by far the most detailed. This raises the question of whether the UK would be taking a larger share of the burden. This is possible, and the document does not provide national estimates in terms of costs. However, as we have pointed out many times, the links between the City of London and Russia are not as huge as is made out. The draft paper stresses that financial links come from around the EU, seemingly confirming this analysis.
  • Reuters notes that the four largest Russian banks with state ownership of over 50% are Sberbank, VTB, the Russian Agriculture Bank and VEB. The first two are listed on the London Stock Exchange. It is not clear what these sanctions would mean for companies such as Gazprombank, which is 100% owned by Gazprom - which in turn is 50% owned by the Russian state.
  • That said, one has to question the level of burden-sharing taking place under these proposals. It seems France would put up almost nothing, as it could achieve a specific carve-out to guarantee that previously agreed arms deals – such as its €1.2 billion Mistral warship sale – are exempted.
  • Once all the caveats are considered, the arms embargo seems essentially pointless. It would also have little impact on Russia since it imports barely any EU arms.
  • The impact of all this on Russia would be mixed. The financial sanctions could have some impact but it would likely be a drawn out one. They would force companies to shift to much shorter financing and force the state to back them up even further – a blow but not a killer one.
  • Linked to all this is the issue of international cooperation. For example, refinancing the €7.5 billion of bonds issued (in 2013) by Russian state-owned banks on EU markets would not be prohibitively difficult if markets in Singapore and Hong Kong are still open to these firms. Similarly, in terms of high tech imports, there may be alternatives on offer. At least on this front, Japan, South Korea and others are unlikely to turn against the West. Of course, the role of China is important. Beijing may help Moscow out (particularly on the finance front), but probably not to the extent Russia is hoping. China is keen to keep its holdings and investments diversified, and also has a lot invested in Russia.
  • The fact that all of the sanctions are only forward-looking is also a big caveat, and allows both sides time to diversify away.
  • Hence, the final question to ask is whether this document will bolster the threat of EU sanctions. In some areas yes, in others no. For example, the detail on financial sanctions will be welcome, although it is unlikely that Putin will be shaking in his boots. On the arms, tech and dual use side, though, the lack of clarity and the number of caveats could actually undermine the EU’s position and would once again highlight how hard it would be to actually reach unanimity to move to 'Stage 3' sanctions.
The document is still being negotiated. We will update our blog as and when we hear of new developments.


Anonymous said...

Euroclowns at their finest...
The arms embargo is there to show that France will suffer too, for they won't be able to sell those ships they haven't gotten orders for yet.
I'd like to see Stage 4, to finally get that EU recovery going...
Can't wait for this Ponzi schema of an union to collapse...

Anonymous said...

I don't see how these sanctions help anyone...what Europe makes and provides can be bought from others...and winter is coming...time maybe for Russia to turn off those gas supplies...that will hurt the economies and industries of the EU, especially Germany...talk about cutting off one's nose to spite one's face...no carrots only sticks = impasse.

Average Englishman said...

I don't see any confusion at all. It seems to me that after its failed foreign policy in the Ukraine helped cause the current crisis, the EUSSR is happy to see sanctions placed on Russia so long as the only country to pay for them is the UK. Simples. Situation normal.

Anonymous said...


Can you provide a graphic showing a breakdown of trade between the EU and Russia by EU nation? Another one giving a breakdown by sector (finance, agriculture, arms and manufactured goods etc) would be most useful to this argument?


R Davis said...

How are sanctions going to work when the Black Market can supply anything for a price ?
All the good & services, that would have been supplied up front & legitimately, will be pass over under the table TAX FREE & INVISIBLE.
So is it that crime & ill gotten gains are the real desired outcomes here ?

Anonymous said...

Evidence is now emerging that Russia is shelling the Ukranian government forces from across the border. What is it going to take for the EU to wake up to this treat? After MH17 Putin can now only survive in power by stoking nationalism at home and more aggression. His "New Russia" is being built on lies, propaganda and deceit. If he ever loses power, he will end up in the Hague for war crimes (like Milosevic). We will need more than sanctions to stop him.