Europe looks towards Russia in response to US foreign policy

Europe looks towards Russia in response to US foreign policy

President Trump’s use of economic sanctions as foreign policy has led European leaders to consider following in Russia’s footsteps. This includes setting up financial institutions beyond American influence to safeguard their interests.  

Western European countries, especially France and Germany, have historically had foreign policy interests unaligned with those of the United States. An example from recent history would be the 2003 invasion of Iraq by the United States, which both France and Germany, as well as a number of other EU countries, formally protested. However, with the election of Donald Trump in the United States, and the following right-wing turn in US foreign policy, these opposing interests have created a number of problems that Paris and Berlin can no longer ignore. More specifically, the widening of US sanctions against countries like Russia and Iran has put in danger numerous business ventures that European companies have in those countries. To shield their companies from the devastating effects of US sanctions, European leaders call for a financially sovereign Europe, following in Russia’s footsteps.

The tension between Europe and the US has been growing since the election of Donald Trump in 2016. In recent times, the transatlantic rift has been most visible in the discussions about two key foreign policy issues: the re-imposition of sanctions on Iran and the pipeline project connecting Russia and Germany, known as Nord Stream 2. These issues have caused many grievances on both sides of the Atlantic. Whereas the United States wants to sell their liquefied natural gas to Europe and impose heavy economic sanctions on Iran, Germany wants to get cheaper gas from Russia and do business with Tehran.

While these foreign policy differences are of a long-standing character, especially the gas dispute, the increase in use of economic sanctions as a foreign policy instrument under President Trump, brings new risks. It has only highlighted the fact that neither the EU nor the individual member states have any means at their disposal to protect the interests of their companies abroad. There is no European financial mechanism that would provide EU companies with the comfort of feeling protected from a sudden shift in US foreign policy. As a consequence, many European companies rather abandon half-finished ventures in countries now under sanctions than risking creating problems for themselves in the United States.

Independent financial channels

Both Paris and Berlin have quickly realized that something fundamental has changed in their relations with Washington, and, by extension, their role in the world. The post-second world war order, based on global cooperation and multinational institutions, has slowly eroded – an arguably unavoidable historical process that was merely accelerated by Trump’s election. In response, Germany’s foreign minister Haiko Maas has continually emphasized the need to strengthen Europe’s autonomy and sovereignty in trade, economic, and financial policy.

“We are working on proposals on how we can make payment channels and systems such as SWIFT more autonomous and how we can set up a European currency fund.”

– Haiko Maas at the opening of the 16th Ambassadors Conference in Berlin

Last month, French Finance Minister Bruone Le Maier spoke about France and its determination to work on an independent European, or at least Franco-German, financing tool which would enable them avoid any harmful impacts of US extraterritorial sanctions. “I want Europe to be a sovereign continent, not a vassal, and that means having totally independent financing instruments that do not exist today,” he emphasized.

The idea of autonomy with regard to financial policy is highly relevant in the context of the two aforementioned foreign policy issues: Nord Stream 2 and Iran. The biggest challenge for the European countries has been to find a way to shield European businesses from potentially devastating effects of US sanctions. Therefore, Germany and France are now working on a European international payment channel that would be independent of the US.

Since any European commercial bank handling transactions with Iran would face U.S. sanctions, there have been two alternative proposals on how to carry out these proceedings with sanctioned entities. One is through the use of central banks. Under this scheme, a central bank would act as an investment fund without investing any money. It would solely collect money for all planned transactions, collate it, and then send it to Iran, where the individual payments would be re-distributed to their intended recipients.

The central banks involved in such transactions would still be violating the same sanctions as commercial banks, and, potentially, could face the same consequences. The idea is that Trump’s administration would not go as far as to sanction the central bank of an allied state, which could potentially serve as an excuse for the Europeans to create a secure banking architecture extending far beyond the Iran issue.

The other option is to create a European payment system (special purpose vehicle) that would be independent of the dominant existing international system SWIFT. It would have similar functions but without the interference of the US administration. EU’s top foreign policy official Federica Mogherini already indicated that a number of European countries would set up a multinational state-backed financial intermediary that would work with companies interested in Iran. Since the U.S. would have no way of knowing who conducts deals through the special purpose vehicle, it would be hard to find the grounds on which it could be sanctioned.

Mirroring Russia’s policies

Ironically, Europe is now pursuing policies that seem to be resembling the actions Russia took after 2014. After the annexation of Crimea and the following US sanctions, Moscow quickly responded by setting up a Russian payment system to reduce the power Washington held over its financial transactions. The Mir payment system was successfully launched in April 2015. Besides the payments system, Russia also created a bank specifically designed to shield its defense industry from any new US sanctions.

In November 2017, reacting to the sanctions pressure from the US State Department, Moscow created a list identifying all banks that finance companies in the military and defense industry. Subsequently, the Russian government chose one of the country’s biggest banks Promsvyazbank, nationalized by the Central Bank of Russia in December, as Russia’s new “defense bank”. The bank was then transferred to government ownership and recapitalized –  serving only Russia’s defense sector, and not conducting any financial transactions with the United States, the bank has been immune to the threat of US sanctions.

It is unclear in which specific direction Germany and France will go to sidestep US sanctions, but their commitment to financial sovereignty is conspicuous, and Moscow seems content with the current state of affairs in Europe. For Russia, it would be easier to convince individual members states of the EU to drop the sanctions than the entire bloc composed of the EU and the US.

Russia has been long complaining about Europe getting orders from Washington but with independent financial channels, European countries could deal with Russia on their own terms. Although this would depend on the level of political consensus within Europe. The question would be whether the EU, composed of 28 member states, would be able to formulate a single Russia policy, which so far seems unlikely. The reason for that is that the EU is a collection of countries with an enormously varied historical experience with Russia. This has resulted in a mix of attitudes towards the neighbour to the east, ranging from Poland’s fierce hostility to a more pragmatic Russia policy of countries like Italy or Hungary.

Categories: Economics, Europe

About Author

Filip Brokes

Originally from Prague, the Czech Republic, Filip holds a double MSc in Global Communications from the State University of Saint Petersburg and the Free University of Berlin. As an independent journalist, he has been covering the post-soviet space and Central and Eastern Europe for a number of prominent media outlets. Filip is interested in the intersection of politics and the economy. Besides his native Czech, he speaks fluent Russian, German and English.