It would be a nightmarish scenario for the United States, if western sanctions push Russia closer to China
Beneath their tough political rhetoric, European leaders are still
wrestling uneasily over the ambit of punitive economic measures to be
used against Russia for its role in the Ukrainian and Crimean
developments.
Following the announcement by U.S. President Barack Obama of an expanded
list of 21 individuals who will face bank asset freezes and travel
bans, European Union (EU) leaders who met in Brussels increased their
own list by 12, but postponed releasing the names till March 21 [when
this went to print].
The sanctions are, at least for the present, seen as a political
reproach of Russian President Vladimir Putin’s facilitation of Crimea’s
integration into Russia. Even though the pressure was turned up a notch
on March 20 to include several senior Russian officials into the
sanctions net, the measures do not match the threatening oratory that
has emerged from western capitals against Russia.
The next step — of broad-based economic sanctions including trade
embargoes and business asset freezes — is likely to see much less of a
consensus between the trans-Atlantic allies, and within the countries of
Europe.
Indeed, at the EU Summit in Brussels on March 20, the 28-nation body
said that it would go to the next level of punitive measures if Russia
were to intervene in eastern Ukraine — an implicit recognition of
Crimea’s integration into Russia as a fait accompli.
The EU sought to enhance its profile as a political player during the
Ukrainian crisis by its direct engagement with the Euromaidan leaders
and its facilitation of the February 21 Agreement between the Opposition
and former Ukrainian President Viktor Yanukovich. However, it has moved
with considerable caution on the issue of economic sanctions.
At the EU Summit, though tougher sanctions were threatened, the focus
was rather on bolstering political and economic ties with Ukraine.
Ukraine’s Prime Minister Arseniy Yatsenyuk signed a political agreement
on March 21 with EU leaders, which will pave the way for the integration
of his country’s interests with Europe.
Fallout of competing sanctions
A full-blown western economic blockade may cripple Russia, but it will
also have a singeing, blowback effect on Europe’s economy. Germany is
likely to be hit the hardest in such an eventuality, a fact that
explains German Chancellor Angela Merkel’s calls for diplomacy — and not
sanctions — to resolve the conflict.
Russia is the EU’s third largest trading partner, a major energy supplier, and a hub of European business investment.
“If they go beyond these token measures, Russia will retaliate, and that
could damage the European economy,” said Robert Oulds, Director of the
Bruges Group, a Eurosceptic think tank based in London.
“Germany is heavily dependent on Russian oil and gas, and if Russia
retaliates with its own sanctions, prices will go up, creating an
economic shock that could spell disaster. The European economy is
already in a deflationary crisis,” he added.
The EU is Russia’s primary trading partner, accounting for over 40 per
cent of its trade. European exports to Russia include machinery and
transport equipment, chemicals, medicines and agricultural products.
The EU imports nearly 80 per cent of Russia’s oil and natural gas
exports, with Germany alone being the single biggest importer of oil and
gas.
In an interview to Der Spiegel, Eckhard Cordes, Chairman of the
Committee on Eastern European Economic Relations, is quoted as saying
that 3,00,000 German jobs could be at risk if a situation of competing
sanctions were to arise between the West and Russia.
“I am very worried that we are going to unleash a downward spiral of
sanctions and counter-sanctions that won’t help anyone,” Mr. Cordes is
quoted as saying.
More than 6,000 German companies are registered in Russia, and together
they have invested €20 billion in recent years, the article says. These
include corporate entities like Siemens, the German chemical giant BASF
(that has holdings in Siberian gas fields), and the energy supplier
E.ON, among others.
Russia has shrugged off the first wave of the West’s largely political sanctions.
The West may well be missing the fact that President Putin is willing to
pay the costs for regaining Crimea. Moreover, the Russians also seem to
be ready to endure the backlash of western sanctions, as more than 80
per cent of respondents in a poll last week said that Russia should
embrace Crimea even if this provokes a backlash from other countries.
The assets freeze of select Russian individuals is likely to misfire
since Mr. Putin, a year ago, ordered all government officials to close
their bank accounts and sell off properties abroad.
However, the political stand-off with the West has increased the outflow
of capital from Russia in the first two months of 2014 to $35 billion
as against about $60 billion for the whole of last year.
Capital flight may rise to $200 billion this year and push the current
account into the red, according to economist Igor Yurgens, deputy head
of the Russian Union of Industrialists and Entrepreneurs (RUIE). The
Russian stock market has lost 17 per cent of its value in March and the
rouble has continued to decline.
Massive economic sanctions would hit Russia much harder, experts have warned.
The threat of financial sanctions has already hampered access to western bank credit for Russian companies.
“Even though foreign markets are formally open, it is impossible for
Russian borrowers to get financing,” said Alexei Marey of Russia’s
top-league Alfa-Bank. “In the worst case scenario, foreign funding may
be closed for Russian entities for one or two years.”
Pinching Russia
Russia is already bracing for possible sanctions. It is reported to have
moved out of the U.S. last week more than half of its $200 billion
worth of U.S. Treasury bonds.
Bloomberg, quoting U.S. Treasury data, reports that Russia is the 11th
largest foreign holder of U.S. Treasury bonds totalling $138.6 billion
at the end of last year. Russia has reportedly moved out more than half
of these.
A comprehensive ban on financial transactions would freeze the assets of
Russian companies in the West, estimated at $500 billion, and cut them
off from western credit sources. This could lead to a Russian slowdown,
from the expected 2.5 per cent to a mere one per cent or even zero
growth, said former Russian Finance Minister Alexei Kudrin.
Trade sanctions would be painful as imports account for 40 per cent of
Russia’s consumption. The share of food imports reaches 50 per cent, but
even Moscow, whose dependence on imported eatables is higher than the
country’s average, says it can compensate for a possible shortfall in
western supplies by stepping up purchases in the BRIC countries.
Russia would be particularly vulnerable to a ban on western high
technologies that were to play a key role in government plans to
modernise industry, including the defence sector. Russian arms exports
could suffer, as high-tech weapon platforms, such as the Su-30MKI
supplied to India, have key systems and components sourced from western
manufacturers.
Moscow responded to the first round of U.S. sanctions with its own
symbolic blacklist of U.S. officials who will be denied Russian visas,
and the Russian Foreign Ministry said Russia’s response to further
sanctions would be “harsh.”
Mr. Putin’s influential economic adviser, Sergei Glaziev, warned that in
the event of U.S. economic sanctions Russia would dump American
Treasuries, refuse to pay off loans to U.S. banks, drop the dollar as a
reserve currency and create an alternative currency system.
In a television interview last week, Russia’s Economic Minister Alexei
Ulyukayev confirmed that Russia would work to switch its foreign trade
from dollars to national currencies.
“Why should we have dollar contracts with China, India, Turkey?” he
asked. “Why do we need this? We must have contracts in national
currencies. This should, above all, apply to our oil and gas companies.”
Western investments in Russia are estimated at over $240 billion and borrowing by Russian companies exceeds $700 billion abroad.
There is a consensus among the Russian expert community that sanctions
will push Russia closer to China, in what could be a nightmarish
scenario for the U.S. Russia may step up defence sales to China and
reorient its energy exports from Europe to the East, a policy Russia
launched several years ago with the construction of an oil pipeline to
its Pacific coast and China.
