By Wojciech Lewandowski, GTM Governance, Europe
On December 19, 2016, the European Council extended its application of economic sanctions against Russia until the end of July, 2017. The decision follows the assessment of the progress in the implementation of the Minsk agreements, which were intended to stop the military conflict in the Donbass region of the Ukraine by December 31, 2015. As a result, major European investment projects in Russia are still being blocked and Russia’s counter-sanctions are hurting a number of European economies. This situation has led to heightened tensions within the European Union (EU), thereby increasing the risk of disunity regarding its policy towards Moscow. What will 2017 bring to already tense relations with Russia?
The sanctions were introduced on July 31, 2014, in response to Russia arming rebels in the Ukraine, and Russia’s failure to cooperate in the investigation over the shooting down of Malaysian Airlines MH17. The sanctions target Russian banks, energy companies, and arms makers, and are extended every six months by the European Council.
The general purpose of economic sanctions is to signal international disapproval with respect to certain specific practices and eventually force the targeted country to reverse them. Has this happened in relation to Russia? Certainly not…
Trade relations between Russia and the EU were already unstable prior to the sanctions due to the Russian economy showing signs of weakness. Once implemented, the sanctions drastically decreased trade flow in the sectors directly restricted by them. Further events, such as the fall in oil prices, freeze of investments and launching of new projects by investors, and Russia’s counter-sanctions on EU food imports, has had a compounding effect on an already strained economic environment. It led to higher food prices in Russia and further inflation with the ruble’s fall in value. The economic cost of the sanctions for EU exports, however, has been minimal due to the fact that Russian imports from EU countries has remained steady. In general, the observed fall in exports from the EU to Russia was entirely due to the recession in Russia.
To succeed, sanctions need to be applied long-term; but will this be achievable from a European perspective? That could be difficult.
Last year, were the first signs of discord within the EU member states with regard to additional economic sanctions against Moscow over its actions in Syria, as a result they were not implemented. The EU member states argue the sanctions complicate large-scale and long-term European projects in Russia in the energy and oil industry. Especially in the latter, Russia seeks cooperation from European companies to jointly develop new projects in the East Asia region. As the EU continues applying sanctions on Russia, European companies in these sectors, supported by armies of lawyers, may be able to partially bypass the negative effects caused by these restrictions 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 disagreement within EU member states concerning their overall Russia stance.
Although not significantly, Russian’s counter-measures have impacted the EU’s agricultural exports. Last year, Belgium farmers held several protests after dumping their produce due to their inability to export it. Similar protests swept across other member states, especially among eastern countries with a manifesting drop in agricultural product prices (e.g. 20% in Poland). Any further application of the agriculture sanctions by Russia may contribute to further weakening of EU agricultural export-oriented agricultural sectors and likely cause new protests throughout 2017.
In 2017, political factors will play a role too. The Russian situation may be debated during the presidential election in France, with center-right and right-wing frontrunners potentially pushing for closer relations with Moscow. It is impossible to foresee the result of the German election and the future policy towards Russia if Angela Merkel is not re-elected. In addition, with President-Elect Donald Trump appearing to be willing to undertake a more open policy towards 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.
The hardships of sanctions were felt in both economies, but the damage to Russia was significant. The losses resulting from a series of EU restrictions have delayed effects, and may only manifest themselves in a few years with a force that is difficult to predict. The EU was affected by Russian’s counter-sanctions, but has managed to redirect its trade flows. Expectations are growing that EU sanctions will be lifted in 2017, or 2018 the latest. Some diplomats in Brussels speculate that a Brexit could hasten their lift, as the UK has been one of the strongest voices for sanctions.
Source: See Decision (CFSP) 2016/2315 amending Decision 2014/512/CFSP.