The Economics of Sanctions: Why Is It So Hard to Sanction Russia?

Written by | Monday, March 10th, 2014

In mid-February, Catherine Ashton convened a meeting of EU foreign ministers to discuss the possibility of imposing sanctions on Russia, which – if materialized – would have been a 180-degree turn on the Ukrainian crisis for the EU28. Few believed that this could eventually happen and following the recent hesitant stance of the European club to sanctioning Russia, skeptics may have been right. The economic reality is simply such that it would be far too dangerous to play around with Russia.
After the United States had recently voiced their threats and plans to take punitive measures against Moscow to castigate the Russian actions in Crimea, the EU has suggested – after it had taken a long time to produce a joint statement on the crisis at all – that it would be better to give up sanctions and push for a political solution between Russia and Ukraine. The vision of assets freezing, visa bans, and trade restrictions seems to be as blur as the possibility that the EU would have the guts to engage in any military action against Russia whatsoever. The cost of imposing sanctions on Europe’s largest oil and natural gas importer could highly overshadow Europe’s altruism and desire to help Ukraine.
The European and Russian economies are heavily intertwined and both Russians and Europeans know it. Moscow accounts for about 33 percent of Europe’s total oil import and almost 40 percent of its gas imports. In 2007, four EU members were completely (meaning 100 percent) dependent on Russia’s oil supplies while Slovakia was the fifth one with 98 percent dependence. Furthermore, seven EU member states were Russia-dependent in more than or about a half of their energy imports, while only France and Belgium bought less than 25 percent of their oil from Moscow. The Ukraine-Russia oil dispute of January 2009 when Gazprom entirely closed its oil taps to Ukraine clearly showed how expensive it could be to run the economy without oil. A reminiscence of the 2009 gas crisis might have popped up again in Brussels whispering that an attempt to irritate Moscow does not have to be a good thing for Europe after all.
The interdependence of both economies however does not break down only to energy sector because Russia is Europe’s number three trading partner although a big part of the mutual trade is naturally oil and natural gas. The European Union exports to Russia mainly machinery and transport equipment as well as medicals, chemicals, and agricultural products. The volume of mutual Russia-Ukraine trade has been growing since 2008 although it was interrupted by the subsequent economic and financial crisis. In 2010, the growth resumed and has continued since then. Whereas the volume of EU’s trade in goods has risen only moderately, its exports of services soared in last four years and both sides felt a pressing need to redefine its legal framework for trading. Therefore, 2008 marked the beginning of a broader ‘EU-Russia Agreement’ that should provide rules for a balanced and predictable trade.
Given the rich trade ties between the two, nobody can really predict the consequences that potential European sanctions against Russia could set off. As demonstrated, trade restrictions are very unlikely and asset freezing could prove ‘inefficient’. About 75 percent of all foreign direct investment in Russia is of European origin, so imagine what would happen if Russia wanted to retaliate. Visa bans look easy to do but given the substantial number of Russian citizens working, studying, and living throughout the European Union, disabling the contact between them and their relatives in Russia could be a bit inhumane, and Brussels does not like the “inhumane”.
All in all, the European Union is not ready to tease Russia, which – albeit seems to have forgotten the Cold War is over – is still a powerful and fiery counterpart. There is no free lunch and the price that Europe would have to pay for sanctions in form of additional deterioration of EU-Russia ties would be simply too high for Europeans to carry. What is more, if Russia really happens to attack Ukraine, no one is going to come for help – neither the US, and nor the EU. The Georgia of 2008 might repeat because the truth is that Europe fears Russia.

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