EU sanctions on Russia: Who would they hurt most?

EU sanctions on Russia: Who holds the key?

EU foreign ministers are meeting today to decide what pressure to put on Russia. However, although trade and economic sanctions have been discussed in the US, the EU is less than enthusiastic. Under the EU treaties trade sanctions are decided unanimously, so all EU states will have a say - and for those wishing to take a harder line, the EU does not hold all the cards.

On paper the EU has a strong hand with Russia. Russia is the third largest trading partner of the EU and the EU is the largest trading partner of Russia and runs a large deficit.


Germany accounts for a large proportion
of the EU's trade with Russia (Eurostat 2013)

Of this EU/Russia trade, Germany is the most important accounting for 30% of the EU's exports to Russia. In addition, there are some states such as Finland who for historical and geographical reasons conduct a large proportion of their trade with Russia, making them vulnerable to an East/West showdown. Through their banking systems, Cyprus and the UK also have important financial and investment links with Russia and Russian individuals.

However, there is another important factor that counts against the EU. For although the EU is a large trading partner, 80% of the EU's imports from Russia are energy. This dependancy is particulay acute for gas - as you can see from the chart below, the Baltic States, the Finns, Czechs, Slovaks and Bulgarians are, according to Eurostat, 100% dependant on Russian gas. A mild winter and a relatively large European stockpile of gas means this risk is perhaps less critical than it might have been in previous years, but it could still cause them severe problems if this dispute were to escalate.

Eurostat (Oct 2012)

So will we see trade sanctions? Well probably not for the practical reasons above, but other sanctions are possible, arms embaragoes are not decided en masse so could be implemented swiftly by the UK, France and Germany. Targeted economic sanctions on individuals are also possible.

So on sanctions, an EU-US good cop/bad cop routine has an element of European self-interest to it.

Would an 'independent' UK get a better US trade deal than the EU?

Could the UK sucessfully negotiate a trade deal with the US?

Yesterday MEPs voted on a resolution to back defensive measures to exclude cultural and some agricultural products, such as genetically modified foods from a proposed free trade deal with the US (TTIP).

Understandably US farmers have already taken exception to what they see as EU protectionism. This raises concerns that the potential gain from an EU/US trade deal may be watered down, delayed or even blocked all together by vested interests on both sides of the Atlantic.

As a member of the EU the UK's foreign trade is governed by the EU's common commercial policy and so has to be done via an EU deal. After the EU the US is the UK's most important trading partner. Some involved in the UK-EU debate - particularly Outers - suggest that if the UK left the EU it could negotiate a deal with the US on better terms than it could potentially gain via the EU. But is that the case? Here are some of the factors that could be important.

UK exports to the US in £bn (ONS 2011) are big...

A mismatch in negotiating power. Although the UK exports a lot to the US, as a % of it's total exports, the US sends only 4% to the UK. So although a trade deal should be mutually beneficial, reaching a solution would be disproportionately in the UK's interests. Therefore, there would be an imbalance of negotiating power. For this the EU's weight could help on issues where the UK's interests are aligned with it.

Would the US want to go through the hassle? Given this asymmetry, and the relative small market the UK is for the US, one question is if the US would go through all the political hurdles -  approval in Congress, taking on the unions etc. Indeed, talk to people in Washington and there's some scepticism about this. (However, the US has signed agreements with 23 states, some very small, so perhaps it is more a matter of the terms you would get?)

But US exports to UK (US BEA 2011) are small...

Fewer protectionist hold ups. At the same time, the US and the UK are more compatible economies than are the US and EU. The UK negotiating on its own account would not be hindered by protectionist issues emanating largely from France and MEPs, that could hold up US agreement or require concessions, such as the protection of agriculture, genetically modified foods or geographical indicators. However the UK is still unlikely to wish to see the US allowed to subsidise its agricultural exports, so tough negotiations would still be required.

Access for financial services could be a tough negotiation. The UK negotiating with the US on financial services would come up against a powerful US lobby attempting to protect its banks from what is New York's main rival - London. However, the UK negotiating on its own would arguably have a better chance to strike a deal on 'reciprocity' with US funds, a more generous arrangement than that which currently exists under regulations such as the AIFM Directive or UCITS. Additionally the UK would not bear the burden of having risky eurozone banks getting in on the deal. In recent negotiations with Singapore the US gained a better deal than the EU on financial services, partly because while Singapore was happy with UK banks it was wary of giving access to all eurozone banks (a big untold story in all of this).

If the idea is that an 'independent' UK can automatically join some gigantic Transatlantic free trade zone, in place of its current EU membership, there will be plenty of hurdles and a good deal is by no means guaranteed. Added to that there's also the small matter of negotiating an equivalent free trade deal with the EU....