The EU stands united in the face of Russia - or does it?

So, about Ukraine...

Arriving in Luxembourg this morning to discuss events in Ukraine with his European counterparts, British Foreign Secretary William Hague called for a "clear and united" EU response to Russia's 'escalation' of the crisis.

Hague added:

There is very little doubt -- there can't really be any real doubt -- that this [the unrest in Eastern Ukraine] is something that has been planned and brought about by Russia. The forces involved are well armed; well trained; well equipped; well coordinated and behaving in exactly the same way as what turned out to be Rusian forces behaved in Crimea, before the full Russian military takeover of Crimea.

He added:

I don't think denials of Russian involvement have a shred of credibility.

Meanwhile, Jean Asselborn, the Foreign Minister of Luxembourg, arriving at the same meeting did not seem to get the memo. He said the following:

I cannot actually imagine -- just how the EU could not identify with the men dressed in black in the Maidan -- I cannot imagine that the Russian side identifies with the men in black, with guns and weapons, that are occupying administrative buildings and government buildings in Eastern Ukraine.

He added:

I am still convinced after I heard President Putin, and the Russian Foreign Minister, that the Russians do not want to destabilise East Ukraine and do not want to occupy Eastern Ukraine.

Meanwhile Frans Timmermans, the Dutch Foreign Minister, opted for a more cryptic message, mixing his ducks with horses. Asked if he thought forces in Eastern Ukraine were acting under Russian directions, he replied:

If it looks like a horse, and it acts like a horse, then it is probably a horse -- not a zebra.

As clear as mud.

What does Alternative für Deutschland really stand for? Its getting hard to tell

Beatrix says change direction - but where to?

When the anti-euro Alternative für Deutschland was first founded, it was derided as a fringe party for professors obsessed with ordoliberalism that would struggle to make a lasting impact on the German political scene.

However, the party got within 0.3% of the vote of winning seats in the Bundestag in September and is polling at around 6%-7% ahead of the European elections, meaning it looks certain to win seats in Brussels/Strasbourg. Yet the party's relatively strong showing in the polls masks serious internal divides along personnel and policy lines.

At the start of the year, it was being reported that some founding members were leaving in disillusionment in the belief that the party was abandoning its liberal roots and embarking on a sharply 'rightward' trajectory, which was manifested by the embracing of traditional Christian moral values and taking a tough line on immigration - AfD were notably the only mainstream German party to praise the results of the Swiss referendum on curbing free movement.

Initially, it seemed that this shift to the 'right' was limited to social policy, with AfD still maintaining its liberalism on economic policy; Hans-Olaf Henkel - the former head of the Federation of German Industries - described it as "Germany's last liberal party". However, this also seems to have been consigned to the past following the party's convention over the weekend at which it voted on its manifesto for the European elections.

Crucially, the party's grassroots voted to reject the EU-US free trade deal (TTIP) currently under negotiation despite strong support from the leadership including party leader Bernd Lucke, who argued that it was a "positive, constructive objective which is very much in Germany's interest". Beatrix von Storch (pictured), an MEP candidate and high profile AfD activist - who for many epitomises the party's recent lurch towards conservatism - argued that the agreement "is not fair and will burden our country".

Interestingly, when it came to the recent events in the Crimea, the party's deputy federal spokesperson criticised the independence referendum but also called for greater "understanding" for Moscow and described the interim Ukrainian government as "not democratically legitimate". A motion was passed (to thundering applause according to FAZ) rejecting German taxpayer assistance for Ukraine and economic sanctions on Russia.

Such sentiments - scepticism of free trade deals (or 'directed trade' as libertarians would say) and emphasises on isolationism in world affairs, puts the AfD closer to either the American "Old Right" (which Europeans tend not to even remotely understand) or the European Socialist Left.

So what does all this mean? Well it seems that AfD are at risk of becoming a catch-all populist party with strongly ideologically contradictory factions rather than one which can be easily placed on the traditional 'left/right' axis. This applies to a number of other European parties which combine elements of both including the National Front, PVV, the (True) Finns party and UKIP (although UKIP economic policy is more liberal than the others'). It also shows that those Tories keen for AfD to join the ECR group in the European Parliament may wish to pause for thought.

To some extent this is not surprising given that even in its early stages the party paradoxically drew disproportionate support from former FDP and Die Linke voters. We also noted after the elections that the party had done particularly well in Eastern Germany, which tends to vote more heavily for left-wing parties than West Germany. In the East, AfD has also struggled to contain creeping take-over attempts by more nationalist elements.

The question for the party is where does it go from here: does it establish itself as a permanent protest party borrowing ideas and policies from the political smorgasbord as it sees fit  - there is clearly a gap in the market - or does it try to remain a genuine economically liberal party angling for a spot in the mainstream?

Crimea's water supply - it's now Moscow's headache

The way influence flows in Crimea

Now that Russia has full military control over Crimea the the implications of taking control are beginning to sink in with President Medvedev claiming that "it's now our headache". The most obvious headaches are electricity and water. Medvedev directly raised this issue saying:

"This question, of course needs to be addressed through international negotiations, but we will need to chose the best way to supply the peninsular." 

An interesting development given Russia's reluctance to engage with Ukraine to date. The water situation in particular should concern Moscow as Ukraine supplies most of Crimea's water, something the above map of the Soviet era North Crimea Canal makes quite clear. So just as Hong Kong's dependence on China reduced the UK's room for manoeuvre, Crimea can not survive without Ukraine.

So what will Russia do? Short of annexing yet more territory to secure the canal - which would surely trigger further sanctions - not to mention a military confrontation with Ukraine - and push them into full economic isolation, logically they must at some point come to the table. Ukraine is unlikely to immediately cut off the water and cause real hardship for the inhabitants, who are still Ukrainian citizens, but nor is Ukraine a charity. In the longer term Russia could try to construct alternative conduits but that would be complex, expensive, and time consuming so some agreement with Kiev will need to be reached.

Obviously expecting to strike a deal with Ukraine so shortly after annexing its territory is unrealistic. But there are numerous other issues that Russia will need to discuss, the transshipment of gas to the EU, Ukraine's outstanding debts to Russia, and other border issues. Russia could perhaps seek to give ground in other areas.

So will Russia change its tune and come to the table? Logic would dictate it has two choices, go further and secure the Crimean hinterland, including the North Crimea Canal or seek a deal with Ukraine. Hopefully it will be the latter...

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.

Could a different type of EU have avoided the Crimean crisis?

Over on Conservative Home Open Europe's Christopher Howarth wrote the following article:

Firstly, a disclaimer: Russia is 100 per cent responsible for its invasion of the Crimea, just as Germany a hundred years ago was for responsible for invading Belgium. Nothing dilutes these facts. However, just as historians disagree as to whether the First World War could have been avoided, it is legitimate to look at whether a better handling of the Ukraine crisis by the “West” generally – and the EU specifically – could have led to a different conclusion.

We need to understand what Russia wants. It has two aims – safeguarding its Black Sea Fleet base in Sevastopol (for emotional as well as strategic reasons) and maintaining a friendly compliant government in Ukraine willing to keep the border open to Russian trade and people. Under both Timoshenko and Yanukovych, this is exactly what Russia had.

So what has caused the current crisis? Russia’s naval base is on a lease, so for now it is protected, but Russia fears that a pro-western Ukrainian Government, joining NATO and the EU, could jeopardise its operation. These fears maybe overdone, but a more potentially serious threat comes to Russia’s trade in the form of Ukraine’s potential EU membership.

The EU is a customs union, which means that its external trade is decided collectively around an external customs wall – the crucial difference between it and a Free Trade area. But as well as being a customs union, the EU has become a political construction with a defence element including a mutual defence guarantee mirroring that of NATO – inserted via the Lisbon Treaty. So from a Russian point of view the EU no longer an economic club, but more a political and defence power block synonymous with NATO. Indeed, Russia is so impressed by the EU as a power block it has sought to imitate it in its own Eurasian Customs Union – which it had hoped Ukraine would join.

EU and candidates and Eurasia and its candidates

Looked at from the inside, the EU eliminates borders, creating an area free of customs, visas and – within Schengen – all border controls. This however comes at a price, and the price is often paid by the EU’s neighbours. We have seen this before in Moldova. Prior to Romanian EU accession, Moldovans could freely travel to Romania but after Romania joined this came to an end – Moldova was on the wrong side of the EU’s external frontier. Unsurprisingly, Russia would not wish for the same on its border with Ukraine.

Ukraine is therefore caught between two opposing power blocks. For many years, Ukraine managed to balance the competing interests and different aspirations of both its Russian and Ukrainian speakers. From Moscow’s point of view, it was working: Ukraine had leaders who accepted Russian largess in exchange for influence, renewed their lease on Sevastopol, kept trade moving and allowed Russians and Ukrainians to travel visa free – something that Ukrainian EU membership could put in danger.

It should therefore have been possible to predict that Russia would react badly to further moves by Ukraine towards the EU. Despite this, no effort seems to have been made either to dampen Russian influence by shoring up Ukraine’s finances, thus enabling them to make the jump, or alternatively to mollify and reassure Russia. We were left to watch as an EU deal with no immediate cash offering was outbid by hard Russian cash with a bankrupt Ukrainian President taking his country swerving to the east. The reaction in western Ukraine was predictable, as was the Russian reaction when protesters hostile to the Russia seemed to take control.

Even at that point, not all was lost for Russia. Ruslan Pukov, a graduate of the Russian Ministry of Foreign Affairs, points out in the New York Times that Tymoshenko was originally Russia’s favoured candidate, that her re-election in an early poll would for Russia have been a reasonable outcome – and for that pro-Russian electors from Crimea within a united Ukraine would help. Speeding up the signing of the EU’s Ukrainian Association Agreement and the pronouncements of some EU foreign ministers about Ukraine’s EU membership potential (however genuine or not) have, however, fanned the fears of those in Russia who feel that Ukraine is on route to being “lost” into an opposing and not necessarily friendly power block. Russia’s preferred option would be a pro-Russian Ukraine. If Russia annexes Crimea, it may look like a Russian victory but in reality would be an admittance of a wider failure.

It is for Ukraine to decide whether it should join the EU. If that is their settled wish, we should not shut the door just to appease Russian sensibilities. Nor should we confuse justifiable anger at corruption (often linked to Russia) with a genuine love of EU integration shared by all Ukrainians. For now, we should help Ukraine improve its standard of government, help it strengthen its economic independence (one way could be through shale gas development) and do what we can, through sanctions, to dissuade Russian aggression. But we should be aware that the makeup of the EU, the nature of its integration and enlargement, combined with ‘all or nothing’ decisions being forced on the Ukraine by both the EU and Russia, have polarised Ukrainian politics and are having consequences.

In the longer term, it is time for the EU to rethink how it deals with its neighbouring states. Those that have chosen not to join the EU or border the EU but will never join deserve better than the imposition of a hard frontier dividing them from historic partners. If the price of EU integration within is division without, someone will pay the price. If the EU was not so rigid, did not require conformity with everything and offered a genuine partnership status that could work for Ukraine without antagonising its other neighbours, it might be a form of membership that others could take up – including, someday, even Russia.

Could Ukrainian shale gas break Ukraine's dependence on Russia?

Could Ukraine's shale gas turn the tables on Russia?

Ukraine is currently both dependant on Russian gas imports (60% of Ukrainian gas comes from Russia) and a major transhipment route for gas to Russia's export markets in the EU. This has historically put Ukraine in a weak position vis-a-vis its eastern neighbour. A fact underlined in the last few days when Gazprom increased the price it charged following the change of government in Kiev, forcing Ukraine to seek emergency finance from the west.

This could however change. Ukraine has two large shale gas deposits, one (the Lubin basin) in the Ukrainian speaking west and another (the Dniper-Donets basin) in the Russian speaking east. The eastern one has, according to the energy consultancy Advanced Resources International, nearly 76 trillion cubic feet (Tcf) of potentially recoverable gas, the western basin shared by Moldova and Poland another 72.5 (Tcf). For context, the same consultancy suggests there are 26 Tcf in the UK and 136.6 Tct in Poland.

Ukraine is in the middle of Russia's export pipe line to the EU

These deposits are therefore sizeable and close to existing pipelines making both production for domestic consumption and export possible. If Ukraine could attract investment to develop these fields then it could measurably improve its energy and economic independence from Russia.

However, Ukraine should not get its hopes up quite yet. Although large in themselves the deposits are small by US standards (they have 1,161 Tcf  of technically recoverable shale) and for that matter Russian (285 Tcf). It is also unlikely they could come on stream in the near future.

The eastern gas deposit falls within
Ukraine's Russian speaking regions

The larger, more obvious problem is political instability. The eastern basin falls exclusively in the Russian speaking part of the country and until the impasse with Russia is broken it is unlikely international energy companies would want to sink the investment needed into an unstable political environment. So if energy independence could help Ukraine escape from Russia's orbit and calm the political crisis, it cannot do so until it has settled its current dispute with Russia. Of course Russia knows this too and Ukraine's shale reserves therefore present another factor in this deeply complicated and difficult geopolitical standoff.

Will EU leaders agree on sanctions for Russia?

EU leaders have arrived in Brussels to discuss the situation in Ukraine, the details of the €11bn aid package announced by Barroso yesterday and how to respond to the Russian occupation of Crimea. At PMQs yesterday, Cameron said that the EU should "display a unity of purpose" and "speak with a clear voice". So what are the prospects for that? We look at the positions adopted by the key players below:

UK: Although it appeared that the UK was ruling out taking supporting strong economic sanctions on the basis of a leaked memo on Monday, since then both Nick Clegg and David Cameron have all said that no economic and diplomatic measures would be off the table. Foreign Minister William Hague indicated yesterday today that "we can’t make progress on that, then of course there will be costs and consequences [for Russia]". Interestingly, he added:

"I think the UK and France are very closely aligned. The Prime Minister has held discussions with President Hollande and with Chancellor Merkel over the last couple of days by telephone."

Germany: As ever the one to watch. The government has hinted that sanctions could be on the table but Foreign Minister Frank-Walter Steinmeier has stated his preference for a political solution and warned against "adding even more fuel to the fire." There is a lot of resistance to sanctions in Germany, and not just in the SPD which has traditionally been seen as favourably disposed towards Moscow. Senior CSU MP Peter Gauweiler, said that:

“If Germany and Russia had a good relationship, then that would be good for Europe. We are looking for a partnership with Kiev, but just as much with Moscow too." 

The German Chambers of Commerce and Industry (DIHK) has warned against sanctions on Russia, saying they “could significantly harm Germany”. Germany's relatively strong dependence on Russian energy sources (30% of its gas and 35% of its oil) as well as its strong exports to Russia (€76.5bn of trade between the two countries annually) give it a strong incentive to avoid wide-reaching economic sanctions.

France: President Hollande has said that, “Russia has taken the risk of a dangerous escalation” – and spoke of the possibility of sanctions, but did not specify what kind, although Foreign Minister Laurent Fabius said they could be "significant".

Italy: Italian Foreign Minister Federica Mogherini has said “the option of a military solution doesn't exist”, but the government's official position is that violations of Ukraine’s sovereignty and territorial integrity “would be totally unacceptable for Italy”. In principle, Italy would back targeted sanctions on Russia. Similar to Germany, though, the approach is more doveish due to higher dependency on Russian gas.

Spain: Spanish Foreign Minister José Manuel García-Margallo said today that Spain would support targeted sanctions, given that it endorsed the conclusions of the meeting of EU foreign ministers on Monday. Then he added, “I said and I say that we wish that the situation calms down and the de-escalation happens” – so the EU is not obliged to resort to sanctions.

Poland: Along with Sweden, Poland has taken the toughest stance on the Ukraine issue. Speaking in parliament yesterday afternoon, Prime Minister Tusk did not pull his punches; he demanded that the EU uses all the tools it has at its disposal, in effect calling for wide-ranging sanctions on Russia, adding that Poland was prepared for this eventuality having stockpiled significant gas reserves. He also made a pointed reference to Europe's "catastrophic" experiences with appeasement in the past.

Tusk: EU needs to be determined and use all its available tools not in order to escalate the situation but in order to de-escalate it
— Pawel Swidlicki (@pswidlicki) March 5, 2014

It now appears likely that some measures will be taken against Russia, the question is how wide ranging these will be. We assess the likelihood of a number of options in the table below:

What is clear so far is that there remains several different views among EU governments on how large a stick they should wield. The upshot is that the US will probably be forced to take the lead role in confronting Russia.

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.