EU sanctions hit European economy harder than the Russian and could seriously affect peacemaking in Ukraine. So, what could be the hidden logic of the move? Radio VR searched for it together with Dr. Richard Wellings, IEA Deputy Editorial Director, and Jon Hellevig, Managing Partner at Hellevig, Klein & Usov.
The European Union and the United States introduced a new round of sanctions against Russia. The new sanctions set limits to Russia’s access to financial markets, ban the sale of dual use equipment to several Russian companies, and increase the number of individuals subject to travel and financial restrictions.
Dmitry Peskov, the press secretary of the Russian President, described the EU’s decision as “absolutely odd and unexplainable on the background of the efforts that in recent days Russia was making to contribute to ending the bloodshed and to a peaceful settlement of the conflict in the south-east of Ukraine”.
Russian Foreign ministry also expressed its dismay over the timing of the step. “We believe that making such decisions at a time when, as we hope, the peace process is stabilizing, means choosing a path aimed at undermining the peace process,” the Russian Foreign Minister Sergei Lavrov told Russia-1 television channel Friday.
Indeed, there seems to be little logic in introducing new sanctions at a moment when peacemaking efforts have been launched, and a fragile ceasefire has been established. There seems to be even less logic considering the sanctions are producing a far greater impact on the European economy than on the Russian…
Dr Richard Wellings, Deputy Editorial Director at the Institute of Economic Affairs (UK):
“This is one peculiar aspect of the EU’s latest round of sanctions, that’s come at a time when there are efforts to try and deescalate the crisis in the eastern Ukraine. And in that respect, it is clearly potentially pretty unhelpful for the EU to be working on the opposite direction and actually ratcheting up the tensions by introducing some quite draconian new measures. This really doesn’t make sense, if the EU’s aim was to try and deescalate the crisis.
But what exactly are the measures we are talking about? And how different are they from the previous?
The earlier sanctions focused on a crackdown on various individuals, freezing assets, travel bans and that kind of things. Then, gradually, over time they’ve been moved up and now we are talking about excluding the Russian state banks from access to long-term loan capital from the European banks, restrictions on exports of equipment that could be used by the military, arms deals in the future are banned and various oil industry technologies are prohibited as well from export to Russia. So, quite a wide range of measures that affect large sectors of the Russian economy.
But do I get it right that the previous sanctions have already affected the European economy itself?
That’s right! The main problem here is that businesses see that each set of sanctions goes deeper and deeper, and has a larger and larger effect, and it gets more serious and this subsequently hurts confidence. So, we have a situation in the EU where the economy is already in a very dire state with the nations of southern Europe facing a full-blown depression, and stagnation in the northern European countries, including Germany.
Over the last decade trade with Russia was actually a bright spot in the otherwise gloomy picture. And that was generating a lot of very useful growth in the otherwise struggling EU economy. So, the fact that this is now a problem and this growth is being artificially chopped off by the European political leaders, does affect confidence, and this means that investors are less willing to invest in the EU economy and, therefore, growth is likely to be significantly lower.
On the other hand, Mr. Füler said something about possible negotiations with the Customs Union on establishing a free trade zone. So, how do we read the controversial signals the EU is emitting?
Yes, I think obviously the EU is deeply divided over the sanctions towards Russia and, indeed, towards the future economic relationship between the EU and Russia as well, looking towards the longer term. I mean, for example, we saw that the Czech Republic and Slovakia were very reluctant to introduce new sanctions, but they were effectively overruled.
And there were all kinds of horse trading going on behind the scenes, whereby favours were exchanged over various different policies that are probably completely unrelated, in order to get the desired results from some of the big players, like the UK and Germany. So, the smaller countries can be effectively pushed aside by offering them various other deals in their favour in related areas.
But clearly, there is a massive division and, at the same time, a lot of the hard-line strategies coming from the US. And there are various European countries that have a very close relationship with the US, and they are unlikely to move too far away from the US strategy on this.
But what is the interest of the US?
Obviously, the US, their trade with Russia is much lower than the EU’s trade is, only around 10th the size. So, the direct cost for the US economy from trade sanctions is much lower than it is for the EU. But the US is more concerned with some of these larger geopolitical issues and the great rivalries between the major powers, and it is concerned about the developing trade between some of these big Eurasian power blocks which would, potentially, leave the US on the periphery as the global economy.
And in that situation, what is the European sentiment towards the Transatlantic Pact?
I think, once again, Europe is deeply divided on that issue with a lot of skepticism, particularly in countries like France, but a lot more enthusiasm in the UK. And, once again, to some extent it reflects the nature of the relationship with the US, and also the local political cultures and to what extent they are pro big business or anti big business, and so on. So, it is mixed, definitely, all these political cultures and traditions in the various EU countries, as well as their relationships with the US.
But, I mean, clearly, we are not speaking about free trade here, it is more about giving more power to various special interests, and particularly to the big business, and various special privileges will be even more entrenched, which will favour big businesses over small businesses and so on. So, we are not talking about free trade here, it is about extending some of these special privileges.
The recent round of sanctions has hit the banking sector. And the banking system is global and it is extremely intricate. So, do you see any kind of ripples which could go through the European banking sector or global banking sector, sent by the recent sanctions?
Yes, that’s a very important issue. And, of course, I've said earlier that the US doesn’t trade that much with Russia. But really, the financial system is where the US could receive some major blowbacks from the economic sanctions, because if it does, through various mechanisms, start to weaken the already very weak European banks, then that will obviously have a knock-on effect on the US banks, and we might expect, in the worst case scenario, another set of bailouts or some sort of Cyprus-style bailings as well.
And a lot of the problems of the European banks haven't been resolved yet, including a lot of bad loans to the eastern European countries that joined the EU recently. And they are obviously in the frontline of any deterioration in trade relations with Russia. So, this could have a massive knock-on effect and this is where the US could take a massive hit via the financial system and the banks.
So, do you think that perhaps the realization of this tendency could reverse the trend?
Well, obviously, there are some voices, particularly, for example, in the German business, who are very worried about this trend towards escalating the trade sanctions and the potential knock-on effect. But we haven't seen any sign so far of the US and its key allies trying to deescalate the situation. For example, we saw David Cameron in the UK calling for the very draconian measures, for example, banning Russia from using the SWIFT payment system, which would have an enormous effect on the whole global economy, potentially.
So, we haven't seen any evidence of some sort of de-escalation. But, once again, you’ve got to distinguish between rhetoric and reality. So, behind the scenes there may be much more debate about these issues. Certainly, they prefer to take a hard-line in public, but, maybe, what is going on behind the scenes is very different”.
Jon Hellevig, Managing Partner at Hellevig, Klein & Usov one of the leading law firms operating in Russia, Ukraine and other CIS countries:
“It is certainly not about Ukraine. Ukraine is only an invented reason for going against Russia. What is really at question here is that the Western elite led by the USA, wants to establish a global hegemony. They want to control the whole world and Russia is the biggest obstacle on their way.
So, what they want to do, and this has been their plan for at least ten years already, they want to suppress Russia. They want to make a regime change here and they want to take over the control of Russia. And that’s why they are doing these sanctions.
Therefore, when we have seen some progress towards peace and a more peaceful life in Ukraine, that progress does not in any way correspond to the Western idea to make sanctions against Russia and that is because they don’t have anything to do with that, in fact.
The sanctions are counterproductive on each level, because the West will not achieve their goal, that’s for sure. It will hasten theirown decline, because the West is not the only economic power in the world anymore. There is China, Asia and all the rest of the world, which has as much economic significance as the West does, at least as much.
And Russia is not like it was in the Cold War period – a communist country that was running a noncompetitive economy. Today Russia is a market economy, it will stay a market economy and things will develop here without the West. Russia is trading and has investments from China, Asia, Indonesia, South America. So, Russia is not going to go down because of these sanctions, this long-term goal cannot be reached.
At the same time, there is suffering in Europe. And I think that at the end of the day, in five or ten years the EU itself will meet the destiny of the Soviet Union. I think the EU will be dissolved.
In the short-term, for all kinds of businesses which are engaged in serving the Western clients, these sanctions are not in any way good, because the business is already lower, that’s for sure. So, who will suffer in the first place, is the Western businesses in Europe and the Western businesses, like we here, serving them. But in the long-term the Russian economy itself will hold on”.
