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Europe hits back at Russia. An economic Cold War ensues

Bit-by-bit sanctions start to hit Russia's economy.

Kyiv 03 21 2014Enlarge
Will sanctions avert escalation? An anti-war mural in central Kyiv. (Sergei Supinsky/AFP/Getty Images)

LISBON, Portugal — It was a morning of dueling signatures.

In Moscow, Vladimir Putin signed a deed making Crimea officially part of Russia.

At the other end of Europe, Ukraine's Prime Minister Arseniy Yatsenyuk joined the leaders of 28 European Union countries in Brussels to ink an agreement designed to tie his nation to the West.

"This is a historic day for my country and we believe this is an historic day for the entire Europe," Yatsenyuk told the EU. "We want to be part of the big European family and this is the first tremendous step."

The timing was significant. This week marks four months since protests erupted in Ukraine's capital, Kyiv, in response to then-President Viktor Yanukovych's last-minute decision to walk away from a similar agreement, under pressure from Putin.

Since then, more than 100 protesters died when Yanukovych's security forces cracked down before he fled to Russia. Putin responded by ordering troops to grab Ukraine's southern Crimea region, which sent East-West tensions lurching to their most dangerous levels since the Cold War.

European leaders ratcheted up the rhetoric Friday at a summit dominated by the Ukraine crisis.

"A sham and illegal referendum has taken place at the barrel of a Kalashnikov," British Prime Minister David Cameron said. "Russia has sought to annex Crimea, a flagrant breach of international law and something we will never recognize."

The EU leaders cancelled summit meetings with Putin, froze Russia out of the G-8, Organization for Cooperation and Development in Europe and the International Energy Agency, and imposed a trade boycott on Crimea — unless its goods come from Ukraine.

Following US President Barack Obama’s announcement of new sanctions on Thursday, they also expanded the list of Russian officials subjected to travel bans and asset freezes.

The 12 new names include Russia's bellicose Deputy Prime Minister Dmitry Rogozin, a couple of close Putin advisors and Kremlin propaganda guru Dmitry Kiselyov. He warned on state TV last week that Russia was capable of "turning the USA into radioactive dust."

However, unlike Washington, the EU did not blacklist any of the powerful business leaders close to Putin.

The reasons partly have to do with economics: Countries such as Britain, Cyprus and the Netherlands have earned big bucks providing homes and tax bolt-holes for Russian oligarchs. There are also legal obstacles: Saudi and Iranian business figures have launched successful court challenges to their inclusion on such EU blacklists in the past.

Putin and his aides have mocked the measures as ineffectual.

The Russian president joked he'd have to "keep my distance" from his tycoon friends, while Rogozin tweeted on Friday that "All these sanctions aren't worth a grain of sand of the Crimean land that returned to Russia.”

But Moscow will find it hard to laugh off sanctions that are starting to bite even before they've been adopted. Fears that Putin’s further escalation in Ukraine could see Europe and the United States impose wider trade sanctions are already hurting Russia's economy.  

The Moscow stock exchange has tumbled 10 percent this year, with major losses again on Friday. Investors are taking flight — more than $60 billion is reported to have left the country so far this year. Yields on Russian debt are soaring, with the government having to pay 9.48 percent on 10-year bonds.

Investors were further spooked by decisions this week by two of the leading ratings agencies — Fitch and Standard & Poor's — to downgrade the economy's outlook from “stable” to "negative."

Customers at the Rossiya Bank — blacklisted by Obama on Thursday — found their credit cards were no longer working as Visa and MasterCard stopped providing services.

So far, neither the United States nor the EU have introduced wider trade sanctions. But Obama said any escalation in Ukraine would trigger measures against key sectors of the Russian economy, including finance, energy, defense and mining.

The European summit leaders tasked EU headquarters to prepare wider sanctions against a similar list — to be applied if Putin orders troops into eastern Ukraine.

"We've created doubt and that doubt is having its effect," French President Francois Hollande said after the summit. "Today deterrence is not military, it's economic."

But further economic sanctions will also have costs for European countries.

France would have to write off a $1.6 billion warship contract that's vital for its beleaguered shipbuilding sector. Britain would suffer from a flight of rich Russians who have made "Londongrad" their playground of choice, while German industry estimates trade with Russia provides some 300,000 jobs that may be at risk.

But despite divergences within the block, leading European countries appear prepared to take a tougher line.

A report published this week by Daniela Schwarzer and Constanze Stelzenmuller — experts with the German Marshall Fund of the United States — warned isolation from the West could have a disastrous impact on the Russian economy relatively quickly.

"Already now, without severe sanctions in place, the Ukraine crisis is taking its toll on Russia economically," they wrote. "With time, Russia could become a failing state... with severe risks for political and social stability in the country."

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Even without sanctions, Russia's crucial energy sector looks set to suffer from the crisis. EU leaders ordered officials to come up with a plan by June to reduce Europe's dependence on Russian oil and gas imports.

"This conflict between Russia and Ukraine has pushed the question of energy diversity to the top of the agenda," said German Chancellor Angela Merkel, adding that Germany would consider reviving plans to build a liquified natural gas terminal rather than rely pipelines with Russia.

The prospect of new domestic gas sources from fracking and imports from the booming US natural gas sector will help.

Several countries will nevertheless find it hard to wean themselves off relatively cheap gas from Russia, which currently provides 30 percent of EU supplies.

But the consequences for Russia could be far worse.

Around 60 percent of Russia’s state income comes from sales of oil, gas and coal. A major contribution to that comes from the state gas giant Gazprom, which gets 60 percent of its revenues from sales to Europe.

That may help account for Putin’s announcement on Friday of a temporary cease-fire in the tit-for-tat sanctions battle between Russia and the West. Albeit a temporary one. 

http://www.globalpost.com/dispatch/news/regions/europe/140321/eu-summit-ukraine-russia-sanctions-economic-cold-war