Will Europe Pass Serious Sanctions? Ctd

The answer – finally –  appears to be yes:

Although the European Union agreed last week to consider sanctions against Russia’s energy, defense, and financial industries, it was unclear how far they would go. It’s still uncertain how broad the sanctions will be, but the call on Monday indicated a change of tone from last week, when EU politicians were trading barbs over whether Britain or France was more reliant on Moscow’s money.

The EU will likely restrict each industry slightly, rather than imposing a full ban — such as an arms embargo. That approach would help address the fundamental problem of different EU countries relying more on Russian business in different industries.

Yglesias is excited:

After a five-way conference call between the leaders of Germany, France, the United Kingdom, and Italy the European Union seems ready to outline tough new sanctions on Russia. Not just the shooting down of MH 17, but Russia’s total lack of remorse or post-shootdown restrain appears to have been a game-changer in terms of German politics and that’s been enough to swing the situation around. The sanctions package is looking very similar to ideas outlined last week in a memo obtained by the Financial Times. The new package belies the notion of a “weak” Europe that is refusing to counter Russian aggression.

But Cassidy doesn’t expect the sanctions to amount to much:

We already know that Russia’s energy sector—which supplies power to many European countries, not just Germany—is likely to escape most of the new restrictions. The exact terms of the arms embargo have yet to be decided, but it isn’t expected to have any effect on existing contracts, such as France’s delivery, later this year, of a Mistral warship. That leaves the new financial sanctions, and I’d be willing to wager that they won’t be as draconian as they might appear, either.

Last week, Anne Applebaum analyzed Putin’s grip on Europe:

Which is worse? France sending Russia a ship that could be used against NATO allies in the Baltic or the Black Sea? Or Britain’s insistence on its right to launder Russian money through London’s financial markets? It was an amusing spat, not least because it plays into the stereotypes: Britain versus France, crooked bankers versus cynical politicians. The dispute dominated headlines as Europeans debated the right response to Russian aggression in eastern Ukraine.

But in some sense, it also disguises the real nature of Russian influence in Europe. For Russia’s strongest political influence is not in relatively large countries such as Britain or France, where at least these things are openly discussed, but rather in weaker countries that barely have a foreign policy debate at all.

Yesterday, Ioffe took a closer look at the EU industries that would be impacted by Russian sanctions

For example, German car manufacturers. Russia is their second-biggest market. If sanctions get in the way of that, German autoworkers are out of some jobs. Or if E.U. sanctions affect defense contracts, French workers building Mistral warships (for which Russia has already paid $1.1 billion) will also find themselves out of a job, and possibly striking. If Russia cuts off titanium exportsit is the world’s largest producer and the best at machining the partsAirbus and Boeing have to stop building Dreamliners and double-deckers.

Countries like Bulgaria and Italy who are reluctant to hit Russia harder are involved in building the South Stream gas pipeline and also see a lot of revenues from Russian tourists. Bulgaria is especially vulnerable: 70 percent of its tourists are Russian. The U.K. financial industry launders a lot of Russian cash, so they are understandably reluctant to voluntarily plug up that flow. Cyprus is in a similar situation, both with Russian tourists and Russian offshores.

“A lot of jobs would be affected, but the macroeconomic effect is less than is often claimed,” says Cliff Kupchan, head of the Russia practice at the Eurasia Group.

Daniel Gross isn’t holding his breath for a bold EU response:

If the EU were suddenly to shut down all the gas pipelines and order Russian oil tankers to turn around, it would certainly inflict some short-term damage on Russia. But there are plenty of other customers out there for Russia’s oil, which is pretty fungible. As for natural gas, the huge new supply deal Putin inked with China means that a large customer will be emerging in Russia’s east. And while European countries could make a point of purchasing oil from non-Russian sources, they don’t have a ready replacement for Russia’s natural gas.

Taking serious steps to reduce purchases of Russian energy would require European leaders to show both moral courage and an overt willingness to inflict financial pain on large and well-connected companies. But both of these things are in short supply—just like natural gas and oil.

Earlier Dish on EU sanctions here.

Will Europe Pass Serious Sanctions? Ctd

Russian Exports

The Bloomberg editors condemn European states for dithering over Russian sanctions:

It’s true that sanctions alone may not persuade Putin to end his support of separatists in Ukraine. But there’s a chance they might — and even if they don’t, they’re still worthwhile. One thing sanctions can do — and there is some evidence they are hurting Russia’s economy already — is deter future behavior. If Putin has unleashed a nationalist hunger to restore Russian dominance that he has lost either the will or the ability to control, all the more reason to cut off the arms and money that fuel further adventures, in Ukraine or elsewhere.

Steve LeVine suggests targeting Gazprom could be effective:

Some analysts think that Putin is awaiting a sign of greater Western toughness in reaction to the crash of Malaysia Airlines 17 before deciding what he does next in Ukraine. “If Europe is only going to wag its finger—if he can get away with this kind of crisis—he will be encouraged to destabilize Ukraine even more,” Itzhak Brudny, a professor at the Hebrew University of Jerusalem, told Quartz. Targeting Gazprom—or even hinting that such a move is on the table—could be the best way to display that toughness.

Danny Vinik demonstrates Russia’s reliance on energy exports with the above chart:

This is a double-edged sword: The dependence gives the world significant leverage to inflict economic damage on the Kremlin, but Europe’s reliance on Russian energy exports puts their economies at risk if they follow through on that threat.

Consider: In 2013, the United States exported more than $1.5 trillion of goods. Of those, just $137 billion were either crude oil or petroleum products. (Due to the Energy Department’s slow approval process, the U.S. has a de facto ban on natural gas exports.) In Russia, on the other hand, the export of crude oil, petroleum products, and natural gas made up more than two-thirds of their total exports … Oil and gas revenues make up more than 50 percent of the Russian government’s total revenue, most of it coming from Europe. If the Eurozone nations decided to reduce or end their purchases of Russian oil and natural gas, it would leave a massive hole in the nation’s budget.

Mark Whitehouse observes that “Europe’s economic ties to Russia are much stronger than they were when Putin came to power”:

Back in February 1999, soon after he took over from former President Boris Yeltsin, Russia’s share of German exports and imports was less than half what it is today. Apparently, building new pipelines to Europe has served Russia’s geopolitical interests well.

Jason Karaian finds that European public opinion is turning against Russia:

After the downing of a Malaysia Airlines plane in eastern Ukraine, more than half of Germans polled now support trade sanctions against Russia. This is a big jump from a similar survey in March, just after Russia’s annexation of Crimea … Support for sanctions rose even more in the UK over the same period, which will encourage prime minister David Cameron to keep up the tough talk against Russia, including picking fights with allies he deems less committed to the cause. But the British public is less keen on freezing financial assets than imposing trade embargoes, perhaps reflecting how much Russian cash currently flows through London’s financial center.

Earlier Dish on possible EU sanctions here.

Will Europe Pass Serious Sanctions? Ctd

foriegn markets

Yglesias argues that the EU is in the driver’s seat:

Here’s the one fact you need to know to understand where the real balance of power lies: Russia’s top trading partner is the European Union, but the EU’s top trading partner is the United States followed by China. In other words, the 306 billion euro trading relationship is a big deal either way you slice it, but it’s fundamentally a bigger deal for Russia than it is for Europe

And, as Tim Fernholz illustrates with the above chart, the Dutch have significant Russian capital under their control:

It’s no accident that Netherlands is one Russia’s largest offshore-financial centers—it has actively welcomed capital flows from multinational companies seeking to avoid taxes and scrutiny, and it just so happens many of those companies are Russian, often with ties to the Kremlin. That capital is useful for a small country like the Netherlands, but if investigators are able to prove allegations of Russian involvement in the air disaster, it will put the Netherlands’ financial sector in an uncomfortable bind: Can it be a banker to Russia’s biggest companies while Putin’s regime supports groups that murder Dutch citizens?

Yglesias, in another post, assumes that Europe will crack down on Russia eventually:

[N]o anti-Russian move comes without some costs. And those costs fall differently on different European countries. So everyone’s preference is for someone else to bear the cost. But that doesn’t mean nothing will be done. It merely means that some arrangement needs to be worked out to share the burden. That takes time. But pressure on Putin is steadily ratcheting up, and the Russian leader is fitfully trying to distance himself from his own overreach in Ukraine. Europe is slow, not weak.

Earlier Dish on possible EU sanctions here.

Will Europe Pass Serious Sanctions?

Bloomberg View’s editors urge them to:

There is no guarantee that sanctions of any kind will get Putin to back down over Ukraine. But the EU needs to demonstrate that it cares enough and is united enough to stop him — even at some cost to their own interests — if he is to be deterred from further adventures in Ukraine or beyond.

Amen. Vinik doubts, however, that EU sanctions will have teeth:

U.S. sanctions will only act as a deterrent if Europe credibly threatens to impose sweeping sanctions on the Kremlin. If banks don’t believe that the E.U. would ever sanction Rosneft, then they won’t worry about extending euro-denominated loans to it, no matter what the U.S. does. It’s hard to see how Europe can make a credible threat, given the mutually assured economic destruction that would result.

 For that reason, financial markets have not reacted negatively to Thursday’s events. The S&P 500 and Dow Jones index are both up around a percent Friday.

“If what we’re observing is all that we get, then I think the economy fallout on the U.S. is very small,” said Mark Zandi, the chief economist at Moody’s. “I don’t think it’s significant. It’s showing up in a bit higher oil prices. Stock prices are down. This is very, very marginal in the grand scheme of things.”

Yglesias observes that one “quirk of the situation is that the European Union voted for tougher sanctions on Russia on Wednesday, less than 36 hours before the destruction of MH17″:

That included suspension of billions of dollars in loans to Russian public sector projects and potential asset freezes on wealthy Russians who are financing separatist groups in Ukraine. Had these new sanctions not been already agreed to, this menu of options likely would have been the first wave of EU response to a new Russian provocation. But since these measures were already in the works, Europe has already plucked its lowest-hanging fruit and will need to think of some new ideas if more conclusive evidence forces European leaders to deliver consequences.

Meanwhile, Putin passed some toothless sanctions of his own last week:

Moscow knows the new sanctions on Abu Ghraib and Guantanamo officials won’t have much practical effect. But the fact the measures were made public shows that Putin is trying to bolster his argument that the U.S., rather than Russia, is the country that’s egregiously violating human rights and international law.