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OPINION / ANALYSIS

MH17 Fiasco: Will European Union Impose Sanctions on Russia?

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ROHIT PATTNAIK
July 30, 2014

After the tragic downing of flight MH17, the US along with some major European countries has called for “hard-hitting sanctions” on Russia. The UK is pushing for the tough “Tier 3” sanctions against Russia that could cover areas such as financial services, trade and energy exports. However, there are growing concerns that the strongest-possible sanctions will be blocked by EU member states because of French arms sales as well as German dependence on fossil fuels from Russia.
 
Although European officials were quick to blame Russia directly for the unfortunate incident, citing reports that Moscow had allowed the flow of heavy and sophisticated weaponry across its border to Ukrainian separatists backed by it, there has yet been no unanimous decision in regards to stronger sanctions.
 
The EU has been debating sanctions since the annexation of Crimea in March this year. But with most economies across Europe spluttering, many governments are unwilling to irk Moscow and bear the economic costs. The current EU sanctions are thus targeted only at people and organisations that provide support to Russian decision-makers. The next phase could include trade restrictions on defence, energy and high-technology as well as restricting Russia’s access to credit markets.
 
It is likely that some of the major European countries will parry efforts to take the sanctions to next phase, which includes stringent restrictions.  France, for example, has opposed sanctions against arms sales to Russia, in part because it is building two helicopter ships for the Russian military. The UK, which has been the most vociferous against arms sales, calling France to cancel its sale, continues to export weapons to Russia. Germany has stated that it needed to keep lines of communication open with Moscow, while reports indicate that an estimated 25,000 German jobs would be at risk if stricter sanctions were imposed. Germany is Russia’s largest trading partner in Europe and German business lobby firms remain vehemently opposed to stronger sanctions against Russia.
 
Even the Netherlands is unlikely to support very strong sanctions as the Dutch are one of Russia’s biggest trading partners. The Dutch were the largest importers of Russian oil and gas, most of which is resold across Europe. Further on, the Dutch company Shell is one of the largest investors in Russia. Even Russia’s staunchest critic in Eastern Europe – Poland -- is dependent on Russian gas, which accounts for over 80% of its imports. It is this entanglement in the energy sector that is emblematic of the ties between Russia and the European countries. This is the major concern as each country would want to ensure its interests while collectively trying to impose sanctions. It is the difficulty of assuaging interests of all its members that is going to prove difficult to achieve stronger sanctions. It is thus clear that any sanction as stringent as the US sanctions are unlikely with Europe heavily dependent on Russian oil and gas.
 
On the other hand, with sanctions aimed at restricting capital movement from Russia and curbs on exports of defence and energy technologies being discussed, these sanctions will surely hurt Russia badly. It is actually the risk of retaliatory sanctions by Moscow that are reducing the possible unanimity in regards to the severity of sanctions to be imposed. If Russia retaliates by choking off oil and gas export to the west and instead chooses to export to alternative markets in energy hungry Asia, it could be catastrophic for many European economies. It is also clear that Russia would lose heavily if it were to turn off supplies. In the immediate aftermath of a stoppage, the west could access its strategic reserves and OPEC could start pumping additional crude. Even in this eventuality, not all OPEC countries would have the additional reserves to increase production to match the loss of Russian crude in the market. In short, it would lead to financial markets going haywire with crude and gas prices skyrocketing.
 
It is this uncertainty over Russia’s reaction to possible sanctions that has the potential to grow into a global economic crisis -- unwarranted at this time. Needless to say, this factor, at present, weighs heavily across the region. Given that it could be economically hurtful for both Russia and Europe, all talks of sanctions will merely remain talks that will look tough but will not bite for certain. Despite the rhetoric and tough talk on display, actual sanctions being imposed by the EU are unlikely to be very punitive as any serious sanctions aimed at isolating and punishing Russia are likely to boomerang on many European countries that are economically enmeshed with the Russian economy and are dependent on Russian energy supplies. In addition, most of them do not want an isolationist Moscow given the shared geographic proximity and their energy dependency on Russia. The realpolitik will dictate that they will reconcile themselves to an increasingly assertive Russia.
 
What we are likely to witness is Russia continuing to quietly pressurise the rebels backed by Moscow to cooperate with international investigators at the crash site, which will deflect anger in the short-term. It is, however, unlikely that Moscow would stop supporting the separatists and thus the status quo is likely to remain. The economic costs of governing by proxy will be costly for Moscow. Global events like the Middle East crisis too will help to shift the focus away from Russia. Since stronger sanctions on Russia are likely to have a significant impact, we are unlikely to see sanctions as strong as advocated by the US likely from the EU side.
 
The signing of the $400 billion gas deal with Beijing is an indicator of how Moscow wants to ensure that it has a diversified market for its supplies. As far as India is concerned, any spike in energy prices is unwelcome and reports of a pipeline between India and Russia will remain speculative as the costs far outweigh the gains. It is likely that after this crisis, the Europeans will try to gradually wean themselves off Russian energy, which they could up to a degree. From an Indian perspective, Russian crude from the Far East could flow into India in greater volume as it looks to diversify its markets.
 
A factor to be noted in the entire crisis is the lack of direct communication between Washington and Moscow in defusing it. Instead, the only talk emanating is of stronger sanctions and punishing Russia. Washington almost always has actively espoused dialogue during a crisis -- something that New Delhi gets advised by the US despite repeated breaking of rules by Islamabad -- yet we see Washington not engaging Moscow. Talk about supplying arms to Ukraine is likely to escalate the crisis and further destabilise the region. With a litany of crises across the globe from Libya/ Syria/ Iraq/ Iran/ Afghanistan and Israel needing Washington’s attention and Moscow’s cooperation, it is unusual that Washington would look to open another front. Moscow is a $2 trillion plus economy and so sanctions will not have an immediate impact as well.
 
The moot question is: will this crisis be handled through smart diplomacy or will it become a full blown crisis?

Rohit Pattnaik is a Delhi based energy and environment researcher