by N. Peter Kramer
The European Union threatens tough sanctions in the event of Russian military aggression against Ukraine. But it looks like the harder the EU hits, the more it cuts itself into the skin. The question is whether Russia is still very vulnerable to international sanctions. Combined with falling oil prices, international sanctions over the annexation of Crimea in 2014 hurt the Russian economy. But the Financial Times recently concluded that Moscow is better prepared than ever for possible ‘crippling sanctions’ because Putin has turned his country in a ‘financial fortress’.
The recent rise in gas and oil prices means that Russia’s national welfare fund of $185 billion in treasury and foreign exchange reserves have risen to $615 billion, researchers Michael Kofman and Andrea Kendall-Taylor pointed out in Foreign Affairs. “A new policy of import substitution in response to international sanctions has revitalised the Russian agricultural sector. The Kremlin has also refocused trade from the West towards China, which is Russia’s largest trading partner today”, the two authors said.
The European Commission is still working on a list of possible sanctions, in consultation with the Member States. But reaching unanimity on sanctions that really bite with 27 is going to be harder than agreeing on the general principle. Italian Prime Minister Mario Draghi admitted that the European Union is weak: ‘Do we have missiles, ships, cannons, armies? Not at the moment’, he said. ‘We Europeans have at most some form of economic deterrence. But here too we have to think a bit if we want to impose sanctions that also affect gas. Are we strong enough right now to do that?. The answer is clearly no.’ EU governments are already pondering how to mitigate the impact of high energy prices on businesses and citizens’ incomes.
Another sanction with ‘massive’ consequences would be the exclusion of Russia from the international payment system Swift, US owned and based in Belgium. But according to Alexander Libman, Russia expert at the University of Berlin, that would be ‘an atomic bomb for both the financial system and international trade’. The sale of oil and gas could come to a standstill and ‘we will have a massive price increase on the gas market, with enormous consequences for the European economy’. The EU depends on Russia for 41 percent of its gas supply and 27 percent of its oil. According to the German Newspaper Handelsblatt, that option has since been withdrawn.
In the meantime, President Macron is understandably angry that the EU (France holds at the moment the rotating EU Presidency) is not involved in the Russia – US talks about the Ukraine issue, and also not in the US - UK approach of the problem. Result? Friday Macron will have a phone call with his Russian counterpart Putin, for a resumption of negotiations in the ‘Normandy format’, between Russia, Ukraine, France and Germany. May be this will bring de-escalation in sight.
