Russia: EU Sanctions to be Extended to December

Published on May 20, 2015

There has been a good deal of speculation lately over the capacity of the 28 EU countries to find a consensus at the upcoming June European Council to extend the current sectoral sanctions regime against Russia beyond its July 29 expiration. While certain countries have been extremely vocal in their opposition to a renewal of the sanctions, it is our strong sense a six month-extension until December now appears highly likely.

*** The measures to be extended at this stage are related to trade and, most importantly, the financing of certain Russian companies on EU markets. The decision to only extend them for six months instead of a year is already a compromise, and in the hopeful chance that implementation of the Minsk Agreement on Ukraine is fulfilled according to the road map, a sanctions scale-back might even be possible by the beginning of 2016. ***

*** The biggest opponents in the EU to the sectoral sanctions – Italy, Hungary, France and Cyprus – we are told, have not even been the countries most hurt by the sanctions. The sanctions were designed in a way to exploit the asymmetrical nature of the Russian economy, that is to say, its heavy dependence on foreign capital markets, and ironically, it has turned out the countries most enthusiastic about sanctions – the UK, Poland, and the Baltic states – have been impacted the most from them and Russia’s subsequent response. ***

*** Beyond the six month extension, the wild card remains the unpredictable behavior of Russian President Vladimir Putin. Even well-informed, high level EU officials admit that while cautiously optimistic, they still have not figured out what his intentions are with regard to Eastern Ukraine and implementation of the Minsk Accord. ***

Rationale for an Extension

The Commission’s original calculation was that the sectoral sanctions would start biting Russia after a year and a half, but the fall in oil prices and the collapse of the Ruble last December accelerated the process.

EU officials point out that a number of Russian companies will have to refinance a significant amount of dollar-denominated corporate debt by September of 2015, and so it is crucial these sanctions, in order to be effective, remain in place after their current expiry in July. That may force Russia among other steps to monetize Rosneft’s debt in order to give the company indirect access to the Central Bank and its hard currency reserves.

Indeed, the sanctions were designed as much as possible to hurt Russia the most with as little impact as possible on European companies. The European Commission studied the options and chose specifically to focus on finance far more than on trade, targeting the biggest Russian banks and their access to hard currency. The model and rationale was to a large extent based on their experience with Iran, where the EU and US believed the ban on financial transactions and insurance for Iranian oil tankers was far more effective than the porous oil export sanctions.

The economic arguments vocally being made by the Italians, the Hungarians and the Cypriots are thus seen within the EU to be largely trivial ones. The countries which are impacted the most by the current sanctions regime, and the Russian response, remain the UK, from sanctions related to securitization and access to capital markets, Poland, and the Baltics, from Russia’s counter-sanctions on agricultural products. None of these countries are about to bend.

The “dovish” countries, Italy, France, Hungary, and Cyprus (plus now Greece, after the elections) are each against sanctions for different reasons. The Italian government is generally against sanctions, mirrored in the position of EU High Representative for Foreign Policy Federica Mogherini even on other areas such as on Iran and Cuba; Cyprus has long standing ties with Russia, and; in France it is mainly the banks (especially BNP) that have complained the loudest, and not the military industry, over missed opportunities in the still resilient Russian economy. Finally, Greece has often expressed – with its new government – solidarity towards Russia, but for all the threats Athens is not expected to play a major role in the sanctions debate.

Come the end of the year, while lifting the sanctions altogether is highly unlikely, a December scale-back is a possibility, depending of course on progress in Ukraine. On that note, the Commission’s unit in charge of such technical details has drafted and kept in reserve different “levels” of sanctions which can be adopted, up or down, depending on changes in the situation on the field. EU officials will take their cue at that point from the foreign policy ministers.

Transatlantic Consensus

The current EU sanctions came in three tiers, and on different schedules. The first level was personal sanctions, whose rationale was to punish individuals directly involved in the “wrong-doings” (the Russian-Crimean leaders, the Yanukovich clique, and a few Russians). Those were considered, at least at that time, as somewhat irrelevant and a slap on the wrist, and flouted as a badge of honor by the recipients. They were first approved in March 2014 and have just been renewed.

The second tier was the imposition of severe limits on Russia’s access to capital markets, including against companies considered to be so-called “instruments of the state.” They were first approved in July 2014 and subsequently reinforced by a ban on loans to companies in September 2014, when Russian tanks crossed into Ukraine. The third set of measures was the ban on dual-use technology and other trade bans targeting certain vital sectors of the Russian economy, such as oil exploitation. Those were also approved in July 2014, and are up for renewal as well.

The capital market and trade measures that are up for renewal shortly were actually prepared long before July 2014, and were introduced first by the US State Department, then finally by the EU after the MH17 incident.

The political environment for passage of the sanctions was ideal at that time. A rather hawkish European Commission had already prepared the measures in advance in order to seize the opportune moment. Indeed, while normally the technical preparation of the sanctions is done under the coordination of the Commission’s Foreign Policy Unit (FPI) and with the participation of a number of the Commission’s departments, in the case of the Russian sectoral sanctions, the order came directly from the Secretary General himself. That was because then President Jose Manuel Barroso was very keen on presenting a forceful response and actively pushed to have the framework ready even before the foreign ministries took the decision.

A year later, and with the heat to some extent off Ukraine, that political will is certainly not as united or strong. But it will be enough from what we understand to push through consensus for another six month extension of the sanction regime on Russia by the upcoming European Council meeting in June.

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