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Tuesday, September 02, 2014

What further sanctions is the EU considering against Russia?

Given the recent escalation in Eastern Ukraine and the increasingly obvious Russian influence in the rebel forces, the EU looks set to impose further economic and financial sanctions on Russia.

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.


Anonymous said...

God help us all.

The organisation that claimed that it was responsible for "ensuring the peace in Europe for the last few decades" has started a war and is now not sure what to do about it.

Europe, and the MananaZone in particular, needs growth and jobs but instead we get war and another "dead cat bounce".

The climate for investment is peace and stability - not this.

Quite frankly I don't blame Putin for any of this. The best place for the chimps that run Europe is a zoo.


Anonymous said...

Anonymous said: "Quite frankly I do not blame Putin for this". And this says it all. Spitting on those who did not start any hostilities and adding something positive about Putin, who started an open aggression to another country (not to say he threw in trash Russia signature of the BP Memorandum where Russia, US, UK promised security and border guarantees for UA in exchange for their giving up nukes). Promises, promises... Nobody going to give up nukes. A country is under attack and someone does not blame Putin for this all. Meaning he is either blind or paid by him.

Rik said...

The issue imho is more with which sanctions Russia will retaliate.
The EU is pretty close to some real nasty stuff (like an import ban on cars or an export ban on Platinum and similar metals). Roughly the stage before freezing pensioners.

Lousy EU sanctions for the UK btw. A lot seems to be financial. Simply meaning that things are moved to HK and Singapore (or dealt with OTC by mainly China).
Same btw by a lot of other people who do not want to run the chance to get the Putin treatment when they invest via US/UK.

Completely mismanaged. This should have been over before the winter comes. You have to be a complete moron to let this keep playing into the autumn.

Anonymous said...

Anonymous KR

The EU has been trying to court the Ukraine with trade deals and aid for a few years now. The Ukraine is right on the Russian border and also has Russia's Black Sea fleet in residence.

What would you do if you were Russia?

Added to this is the fact that the Ukraine is one of the most corrupt countries on this planet and yet another begging bowl basket case when it comes to sucking in EU funds.

It also doesn't fit the profile for EU membership. It is just expansion of empire for the phoney bureaucrats at the EU.

They prodded the bear and woke it up and now they don't know what to do.

You are right - this says it all.


Rik said...

The EU doesnot have the playingfield clear on this one.
Some high on the agenda issues of Putin are (next to cleaning up the Ukraine file and kick the US in its private parts):
-lower Ruble;
-get Russian foreign investment back.

This has effectively achieved that for a large part.
Ruble is lower. More abruptly than desided but nevertheless.
For Russia a lower Ruble is benificial (main exports are in other currencies). Simply pushes exports and reduces imports.

Return of capital seems clear.

Next to the agenda points from the crisis itself. Simply will push Russian (but also other money, from countries or persons that might face the Putin treatment in the future) out of the US (and likely also the UK).

Anonymous said...

having read the various conflicting reports in the last 4 hours re a ceasefire you do have to wonder what is going on.
Tend to agree with SC's comments particularly "Added to this is the fact that the Ukraine is one of the most corrupt countries on this planet and yet another begging bowl basket case when it comes to sucking in EU funds".

Am puzzled by OE blog comment "the big states seem largely to be backing further action and willing to take on a larger share of the economic burden."
does that imply that those who are net recipients of EU funds pay nothing & the "cost" is shared by the few contributors.
How would it or does it work: there was reference somewhere to a spare €500 mill (nice to find !) in the CAP funds. Will it be like the BP settlement for the US oil spill ?

Always good to read OE but sometimes a little more thought about the detail (albeit difficult) would be interesting to see

Open Europe blog team said...

@Anon KS

Thanks for the comment. Just to add a little bit more detail. On that point, we feel that one of the main driving forces behind reaching agreement on sanctions has been that the economic burden has fallen mostly on larger states. This is done via the structuring of the sanctions themselves not via the EU budget or redistribution at this point in time. For example, any Russian access to EU capital markets is very likely to have come through London, therefore it will likely take the biggest burden from banning certain firms access here. Given the size of the City of London this remains a manageable burden in our view. The same goes for the exports of certain high tech equipment for the energy sector, in which Germany is likely to dominate.

Our basic point is that, despite divisions over sanctions, with the larger member states willing to back them and structure them so that smaller economies are not hit too hard, agreement on expanding the sanctions looks more likely than not.

Anonymous said...

So yu are dying that essentially the unelected pillocks in brusssells have decided the uk will take all the brunt of any action they decide to take then?

Anonymous said...

thank you OE for the reply which part answers my questions in as far as "new" sanctions/
But have seen the Baltics, Spain, Finland, , Poland & maybe others saying they would look to EU for compensation.
Where will this come, how much & who will pay.
You will have seen from the other comments that there is little interest or sympathy for Ukraine ( except the people suffering) does OE understand what the EU is trying to achieve & if that is to bring Ukraine into the EU "fold" what that will eventually cost ?

R Davis said...

The EU / US / Ukraine / Russia are about raping & gutting the Ukraine, because they can & it will be fun & personal profit.
What I find more interesting is the 7 Alaskan Islands that are Russian.
Does Obama want them back ?
They are said to be oil rich ?
Yes the Middle East is running out of oil & the U.S wants to be rid of them & the insatiable Israel.
LITHIUM is the NEW GOLD & Alaska is rich in Lithium.
Lithium is used in batteries, lithium batteries for portable consumer electronic devices & PORTABLE SOLAR ENERGY.
In an isolated work place, power down situation, take your coffeemaker camping, your electric shaver, why be primitive in the wilderness.
Enlisting the Sun: Powering U.S. military with Solar Energy.
Does anyone have any idea how much lithium we use today & how much more lithium we will need tomorrow, electric cars will take over our roads eventually.
Lithium is the New GOLD.
Do the 7 Alaskan Islands have deposits of lithium & will the U.S. & Russia fight for procession of them ?