2017 will see more EU division over Russia sanctions

2017 will see more EU division over Russia sanctions
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Russia’s counter-sanctions are hurting various European economies while major investment projects in Russia are being blocked by the EU sanctions regime. This situation has led to enhanced tensions within the EU, thus increasing the risk of disunity regarding its policy towards Moscow.

In late October, the European Union exposed its lack of unity with regard to its Russian policy, as member state delegations disagreed over the potential implementation of additional economic sanctions against Moscow over its actions in Syria. Italian Prime Minister Matteo Renzi led the charge within the Council of the European Union and managed to avoid having the EU move towards the implementation of additional sanctions. This clashed with the line advocated by Germany as Chancellor Angela Merkel overtly threatened Russia over events Syria.

The EU has been implementing, alongside the U.S and Australia, a set of economic sanctions against Russia since March 2014 in response to the Ukrainian crisis. This has prompted counter-sanctions by Moscow. As the situation in Ukraine is now approaching deadlock with a faltering political environment in Kiev and a frozen conflict in the eastern provinces, ongoing sanctions are leading to disunity within the EU. The current measures taken against Moscow are legally binding until late January 2017. In the months leading to their potential renewal, debates and competing arguments within the EU are likely to expose political tensions highlighting competing economic and political interests.

Sanctions hinder major projects

A key argument against the implementation of further sanctions and the potential renewal of the current sanctions regime is that it substantially hinders large-scale and long-term European projects in Russia while delivering arguably limited political gains for the EU. According to information released by senior Italian banking officials, EU sanctions on Russia are currently blocking access to the Russian market for European companies. For instance, for Italy alone, sanctions are currently freezing up to €32 billion in already signed contracts concerning joint Italian and Russian projects in the energy sector. More broadly, EU sanctions on Russia are hindering long-term joint technology and research projects that could take a long a time to restart even if the sanctions regime is not renewed after the January deadline.

In response to the ongoing blockage of European projects in Russia, Rosneft CEO Igor Sechin stated in early November that the company is open to cooperation with its European counterparts to develop new projects in the East Asia region. Since 2014, Russia has been trying to accomplish an Asia pivot, especially toward China, in a bid to diversify its oil and gas export markets. This will likely lead to the development of major infrastructural projects in which both Russian and Chinese firms may wish to involve European partners.

As such, while the EU may continue on its course of economic sanctions against Moscow, European energy companies as well as those involved in the technology field may be able to partially bypass the negative effects caused by these policies by exploiting the opportunities arising in East Asia. This potential discrepancy between the official political line of the EU and private sector interests is likely to underscore an underlying disunity within EU member states concerning their overall Russia stance.

Moscow’s retaliatory measures hurt key sectors

A second factor feeding disunity is generated by the economic impact of Moscow’s own counter-measures. According to studies published in June 2016, the overall cost of Russian counter-sanctions on the EU has been approximately €60 billion. The EU’s export-oriented agricultural sector is mainly affected by this situation.

Russia has implemented a ban on agricultural and food imports, which has substantially affected EU member states’ economies. In Italy, Russian sanctions have so far led to a commercial loss of approximately €800 million.  During the summer of 2016, Belgian farmers staged several protests after they had to throw away large quantities of their produce due to their inability to export it. Similar events have been unfolding throughout the EU with Polish farmers seeing agricultural product prices fall by up to 20 percent in 2016. Moreover, Russian sanctions against the EU are also having negative effects on states associated with. For instance, in 2015 Iceland saw its fish exports to Russia drop by 50 percent. This is a substantial development as the fishing industry accounts for 10 percent of Icelandic exports.

The weakening of agricultural export-oriented sectors among EU member states due to Russian counter-sanctions is likely to further increase the economic woes faced by a whole branch of EU economies. Throughout 2015, farmers have been protesting in several western European countries due to their opposition to EU and national policies. There is a realistic possibility that Russian counter-measures will create a further divide between national and EU institutions as well as local farmers; a situation which could indirectly play into upcoming elections throughout the union.

Domestic tensions in regard to Russia

Beyond the direct and indirect economic costs of Russia’s counter-sanctions, the EU-U.S aligned policy toward Moscow has led to enhanced disunity within member states’ socio-political spheres. This situation is mainly seen in France where centre-right members of parliament of the Les Republicains (LR) party as well as centre-left politicians and members of the right wing Front National (FN) have increasingly been calling upon France and the EU to review their respective policies toward Moscow. As the 2017 presidential election nears in France, the debate over how to deal with Russia is likely to play a substantial role in the overall foreign policy discourse with centre-right and right-wing frontrunners potentially pushing for closer relations with Moscow.

The overall political tensions sparked by rival positions on Russia are highly likely to benefit Eurosceptic parties. These political formations throughout the EU have been generally advocating for foreign policies based on national interests and independent from both the EU and the U.S. The Dutch referendum organised regarding a potential VISA-free policy in April 2016 underscored the discrepancies between EU policies toward Kiev, and indirectly toward Russia, and the wishes of local electorates. The result of April’s referendum came as a stern reminder of the divisions within the EU over the Ukrainian crisis. These are likely to carry over into 2017 and influence the respective national political debates.

In addition, with President-Elect Donald Trump appearing to be willing to undertake a more open policy toward Russia and potentially evolve U.S. positions regarding the status of Crimea, EU leaders will likely find it harder to push for a renewal of economic sanctions against Moscow.

Categories: Economics, Europe

About Author

Riccardo Dugulin

Riccardo Dugulin is an analyst at Drum Cussac, a global business risk consultancy. He specializes in supporting international organizations and large corporations operating in emerging markets by providing them with critical risk management intelligence. His regions of expertise are the Near East, the Gulf, North Africa and Continental Europe. He previously worked as project manager for a French medical assistance company. He gained field experience in the Middle East having worked for leading think tanks in Dubai and Beirut. Riccardo holds a Master in International Affairs from the Sciences Po – Paris and a Bachelor in Middle Eastern Studies from the same university. Follow him on Twitter @RiccardoDugulin.