The drumbeat of criticism of the EU for its slow response to Russian aggression in Ukraine reached a crescendo last week. The Washington Post columnist Fareed Zakaria called the EU 'the great no-show on the international stage'. Yesterday, the EU put in place a sanctions package which represents a major break in post-Cold War EU-Russia relations. Critics of the EU have always misunderstood and under-estimated the nature of European power. Others now risk over-estimating the impact of the EU’s latest decisions.
First, there is no other group of countries which bother to try the fiendishly difficult task of coordinating their foreign policies into a united stance for action rather than just rhetoric. For all the glacial pace and tortuous internal horse-trading, members of the EU frequently manage to bring together 28 national, sovereign perspectives into a united position that carries with it the weight of 500 million people in the world’s largest economy. And when it does, the EU’s decisions can have real economic impact, as Iran and Syria discovered when the EU tightened its sanctions regimes around them in 2011 and 2012.
Second, Russia is Europe’s neighbour. EU members do not have the luxury of posturing. This is partly a matter of geo-economics. EU members collectively import about 35 per cent of their gas from Russia, and Russia is Europe’s third-largest trading partner, behind only the US and China. In contrast, the US imports next to none of its energy from Russia and its trade relationship is worth a twelfth of the EU’s. It is also a matter of geopolitics. A Europe in conflict with its principal eastern neighbour will not only be weaker economically, it will also be hamstrung politically, caught up in fractious internal debates and finding it harder to focus on other critical matters of security, from the Middle East to the rise of China.
Third, Europe was already engaged in confronting Russia, but in ways that did not grab the headlines. Far more devastating for President Vladimir Putin than US sanctions has been the EU decision to sign its Association Agreement with Ukraine, thereby fatally undermining Putin’s plans for a Eurasian Union spanning from Kyiv to Vladivostok. And far more important than its travel bans and asset freezes was the EU’s decision in June to block the South Stream pipeline on competition grounds. This pipeline, if completed, would gradually enable Russia to bypass Ukraine in delivering Russian gas exports to Europe, thereby removing Ukraine’s one source of diplomatic leverage with its large neighbour.
In addition, one of the most effective transmission mechanisms for the US sanctions on Russia was the decision by many European companies to cut back on their business with Russia rather than risk their long-term relationships in the US market. US sanctions contributed directly or indirectly to a fall in German exports to Russia of some 15 per cent in the first half of this year.
Striking the right balance
The question is: now what? Amid all of the Western self-congratulation, the fact remains that imposing sanctions does not constitute success in itself. The test, in the short term, is whether Putin will stop the flows of military support to the Ukrainian separatists. In the longer term, the measure of success is the sovereignty and integrity of Ukraine and a more constructive EU-Russia relationship.
Russia can live with the sanctions for the short term. Oil exports ensure a steady flow of income. Government debt is an envious 15 per cent of GDP. Hard currency reserves, though falling, stand at around $470 billion. President Putin may conclude that the risks to his domestic political authority from defeat over Ukraine are greater than the prospect of a stagnating Russian economy. He may even decide that his plan C for Ukraine – guaranteeing the survival of a pro-Russian statelet around the Donbas region – warrants greater military support or even direct intervention in the coming weeks.
But the sanctions will hit Russia hard economically. Russian growth, which was already falling at the start of 2014, is now projected by the IMF to reach only 0.2 per cent and may tip into recession. Russia’s increasingly indebted corporate sector will find it harder to raise capital via state-owned banks which are now isolated from international financial markets. Russia’s ability to sustain its flow of energy exports and hard currency imports will be constrained by the loss of Western investment and technology for its oil exploration in unconventional fields and off-shore in the Arctic.
President Putin will not change his geopolitical outlook. And the tougher the sanctions, the more he will try to rally business as well as public support to his side. But there is a new generation of Russian business leaders beyond his 'cronies', and they need to be left with some political space and economic incentive to try to influence Russia’s internal debate. Sanctions will be most effective if they remain measured and calibrated just beneath their ultimate ‘level three’ – at two-and-three-quarters, as it were – so as not to cut Russia’s economy off altogether from the West.
While this plays out, the West’s strongest card is to recommit to its own plan A, which is to support Ukrainian economic integration with the EU. The pressures on Ukraine’s economy from an expensive military conflict, rising energy costs, falling tax revenues and a painful recession are driving up its deficit and destabilizing its government. The constructive tools of EU foreign policy are stronger than the coercive. Sustained financial assistance and preferential access to EU markets are essential to Ukraine’s ability to prevail.
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