What impact could this round of Russian retaliatory sanctions have on Europe?

In our continuing effort to bring increased transparency to the murky issue of sanctions we’ve compiled some initial thoughts on the likely Russian retaliatory response to the EU’s latest sanctions – published in full here and which we already analysed in detail here.

There are a few key measures which Russia is said to be considering:

1. Banning or limiting the import of cars (and possibly all automobiles) from Europe.
2. Banning or limiting the import of certain manufactured goods.
3. Banning or limiting the import of certain types of clothing manufactured in Europe.
4. Restricting the access of European flights to Russia airspace, probably over Siberia.

With the previous round of Russian retaliation we saw uproar from the industries involved and some questionable claims for compensation – a process which now looks to have been halted. The response also seemed to weigh on the minds of certain countries, such as Finland and Czech Republic, which in turn played a role in delaying the latest round of sanctions.

With that in mind its worth delving into what impact these mooted measures could have.

In terms of exports of cars, Russia remains quite an important destination for European exports as the graph above from the European Automobile Manufacturers Association shows. In 2012 Russia accounted for 8.1% of EU exports in this sector in terms of value – around €8.7bn. Ultimately, the impact will depend on exactly how the sanctions are structured – we doubt Russia would ban all exports of cars, it could be focused on only used cars or certain types or price brackets. In terms of countries which would be hit the obvious answer is Germany, but other countries such as the UK, France, Belgium and Spain could feel the pinch (albeit on a much smaller scale). Its also important to remember that, even without any sanctions we are already seeing a sharp fall in the level of cars being exported to Russia.

The story for clothing is similar. Russia remains quite an important export market for EU members, with exports to Russia totalling €3.185bn in 2013, making it the second largest destination for exports of EU clothing (graph above from European Fashion and Textiles Export Council). Meanwhile, as the graph below shows, the main countries exposed are Italy and Germany. This area could be particularly sensitive since we have already seen companies such as Adidas warning that the ongoing hostilities between the EU and Russia could severely hamper its business.

Comparing this to the previous round of retaliation, the figures do look a magnitude larger, although it does ultimately depend how broad the sanctions are and how long they last for. The potential sanctions on manufactured goods remains too vague to really assess, however, we can look a bit deeper into the airspace issue.

As the data to the left from FlightRadar24 (compiled by Bloomberg) shows there are lots of flights which use Russian airspace. This map from the Times, highlights that having to fly around Russia would be no small inconvenience and would certainly increase fuel costs and flying times.

So how likely are all these sanctions?

The feeling in Russia seems quite hostile this time around, compared to previously when they have more or less shrugged off the sanctions. This could be because Russia had hoped the ceasefire process would appease the EU, not least after the delay. Furthermore, the EU’s decision to target Rosneft, a key player in the energy market, may be seen as crossing a rubicon, since large energy firms had been largely off limits.

That being said, in the longer term, Russia probably has more to lose out from economic sanctions. Take for example the airspace ban – European firms pay around $185m per year for access to this airspace. Russia would also have to spend additional funds to enforce and police its airspace. Furthermore, the number of Russian flights which use European airspace is far higher, meaning a tit-for-tat sanction in this area would be particularly painful.

Some retaliation seems inevitable but Russia will still need to be cautious of further escalating the growing economic divide with Europe.

On a different planet

This is from an interview with former '68 student revolutionary leader and MEP Daniel Cohn-Bendit.

It's a good insight into the incredibly stubborn and arrogant mentality of many within the European Parliament towards Europe's industrial base, and in particular the automotive industry (one area of heavy industry in which Europe still has a clear comparative advantage):

Q: If you were in Angela Merkel's shoes, how would you respond to German industries that are seeking to put the brakes on the adoption of ambitious objectives?

A: I would tell them: "Listen, too much is too much. We have been telling you for fifteen years now that you have to reduce the CO2 emissions of cars and you still haven't done so. Now you will do it, because regulation will oblige you to do so."

Massive massive hypocrisy (part 187)

No contradictions here:

(1) The Commission proposes various new environmental laws, casually helping itself to new competences in criminal law and taxation as it does so.

(2) The Commissioner in charge of fisheries admits (admittedly not exactly a newsflash) that the Common Fisheries policy is "morally wrong" and that "it is damaging the enviornment". He admits the EU's ludicrously designed policy is leading to the dumping of 880,000 tonnes of dead fish in the north sea every year (releasing at least their own weight in CO2 and methane).

(3) According to one of the other commissioners, Mandelson supposedly asked for his company car to be a environmentaly friendly er... Maserati. He didn't get the £80,000 supercar (in fact his people are denying it this morning), but at a cool 440gCO2 /km it would have been about three and a half times over the Commission's recently proposed 130g /km maximum. Some are more equal than others...

In other news, Dan Hannan has started a blog... his first piece looks at ludicrous EU expenses & perks. They are not going to be reformed any time soon... according to a recent written answer there is no discussion about stripping EU officials of their special low rates of tax. Dawn Primarolo says there are "no plans to amend" the current arrangements. At just 11% income tax EU officials can afford to cough up for the various measures the EU is now proposing.

The EU is also proposing a ban on smoking in public buildings which appears to have no legal basis, wheras the European Parliament has just dumped its own smoke ban. Remember: do as we say, not as we do.