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Coffee House

Can the European Union agree a sanctions regime for Russia?

22 July 2014

8:31 AM

22 July 2014

8:31 AM

David Cameron talked tough on sanctions yesterday, suggesting that he had the German and French support. I believe he means what he says and is serious about following through with sanctions. I could even be convinced that France and Germany have hardened their positions to the point where they are genuinely willing to consider ‘stage three’ sanctions (which would hit specific firms and possibly sectors of the Russian economy). However, I remain far less convinced that the EU as a bloc can find a clear and united position – as Open Europe noted with its Dove/Hawk scale the divergences between countries are huge and the motivations for their positions is incredibly varied.

The UK Government is increasingly convinced of the need to inflict direct costs on the Russian regime as punishment for Vladimir Putin’s boisterous brand of Russian nationalism. It says that it is willing to stomach the potential collateral damage to the City of London (which in my view would be manageable) but it is not willing to bear the cost alone.

Whilst the German position has hardened, and there is increasing disillusionment with Putin, the historical and economic ties between the countries are significant and Germany continues to favour a mediating role rather than overt leadership in European foreign policy. Similarly, while the French government is talking a strong game there still seems to be little willingness to stomach any significant cost from the sanctions – not least in terms of scrapping its Mistral warships deal.

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Once the other 25 states are thrown into the mix, one has to consider whether a common position will truly hold. The Baltic states and Poland will be pushing for a very tough line, and they may get support from the likes of Sweden and the Netherlands – the UK would find it tough not to lead this group. However, Italy and Spain will probably question the need for action before the facts are clear, and highlight the concerns over the economic costs of such sanctions with the eurozone crisis still at the forefront of their minds – Greece, Cyprus and Bulgaria would surely support such sentiments. Given that there is growing political momentum for sanctions, it is likely that something will be done. But the temptation will be to water down the proposed sanctions, which could in turn reduce their credibility.

The menu of potential sanctions is lengthy but the final choice will necessarily require a mix to ensure that the burden is shared. This would likely involve hitting the highest level of the Russian establishment with asset and travel bans but there remains great uncertainty about the possibility of ‘stage three’ sanctions targeted at the financial, energy and defence sectors.  EU finance ministers could opt for an outright end to deals with Russia in these areas. The more likely option seems to be something similar to the US approach of limiting certain Russian firms’ debt and equity finance on European markets; halting future defence contracts and limiting the export of specific high-tech and manufacturing equipment to Russian firms.

Fundamentally, the problem remains that the EU does not have a clear vision of what the overarching goal is – or an answer to the famous question posed by a certain US General, ‘Tell me how this ends?’ Despite months of talking, the answer to this admittedly difficult question has barely been addressed and the EU has wasted a period of relative calm (at least in terms of this crisis) without making any progress on this issue. Experience has shown us that sanctions rarely have a serious effect without a clear goal and strong political will behind them. Don’t therefore be surprised if what is agreed in the coming days and weeks falls short of the growing expectations.

Raoul Ruparel is Head of Economic Research at Open Europe. 

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