EU Sanctions against Russia: facts and perspectives of a lose-lose game

On June and September 2015, the Council of the EU (“Council”) announced the decision to prolong individual and economic sanctions against Russia until respectively 15 March and 31 January 2016. Such measures were originally adopted against Russia’s destabilization of Ukrainian territory, within the meaning of the 2005 Council’s Guidelines on implementation and evaluation of sanctions in the framework of the EU Common Foreign and Security Policy. These last extensions came “with a view to complete implementation of Minsk agreement”, as commented by Susanne Kiefer, the Council’s press for foreign affairs. Paolo Gentiloni, Italian Minister of Foreign Affairs, followed up what stated by Mrs. Kiefer and underlined also that keeping up a dialogue with Russia is “crucially important”, especially on Libya and Syria. Therefore, in which way could these sanctions be able to move balances on the international diplomatic exchequer?

On 17 March 2014, the Council had issued Regulation 269/2014, which consists in a comprehensive package of individual sanctions aimed to respond to the Russian invasion and annexation of Crimea and Sevastopol. Indeed, this military action represents a violation of the 1994 Budapest Memorandum on sovereignty and territorial integrity of Ukraine, whose Russia is a signatory State since 2009. Moreover, Crimea’s decision to hold a referendum on May 2014 on the future state of the territory is considered “illegal” from the Council, because it clashes against the Constitution of Ukraine. The Regulation concerns mainly asset freezes in the EU (point 4) and travel bans (point 3) for Russian and Ukrainian “natural and legal persons, entities and bodies” involved, in various capacities, in supporting annexation of Crimea, and therefore listed in the Annex I of the Regulation. Within this first cycle of sanctions, asset freezes and travel bans have been issued as well by other allies of the EU, namely by USA, Japan, Canada, Australia and New Zealand, while other non-EU countries (Albania, Iceland, Montenegro and Norway) aligned themselves with the decisions adopted on 17 March by the EU.

On July and September 2014, after having noticed no stabilization in that region of Ukraine, the Council complemented the sanctions agreed in March with others aimed to affect not only individuals but eventually also the whole system of relations entertained between certain Russian economic sectors and the EU. Through Regulation 826/2014, eight persons and three entities belonging to the financial sector, exports of oil-related technologies and exports of military and dual-use equipment and technologies were added for the first time to the Annex I. Instead, the so-called “Phase-Three Plus” adopted in September with Regulation 959/2014 is rather aimed to enhance the decisions taken in July by restricting Russia’s access to the EU capital market, as well as the supplies for Russian defense, energy and financial sectors.

At this stage, the turning point is (actually, it still might be) the signature of the above-mentioned Minsk agreement. This cease-fire deal signed on 12 February 2015 currently replaces the so-called “Minsk Protocol”, a previous agreement reached on September 2014 by Ukraine Government, separatist leaders and OSCE, and failed in its intent to halt the ongoing war in the Donbass region. Indeed, the following occurrence of the Donbass general elections, held before the terms provided by the Ukrainian law, and a violent territory sectioning carried on by pro-Russian separatists resulted in an escalation of violence that claimed a more comprehensive treaty, namely a proper meeting point for EU leaders and Russia as well. The renewed diplomatic talks held between Vladimir Putin, Petro Poroshenko, Angela Merkel and François Hollande during the night of 11 February eventually led to a set of measures, which includes:

  • A definitive ceasefire;
  • Withdrawal of heavy weapons from Ukraine and release of all prisoners;
  • Withdrawal of all foreign-armed formations from Ukraine and disarmament of illegal groups;
  • A constitutional reform that restores the traditional Ukrainian borders by December 2015.

After reaching such a deal on ceasefire, disarmament and stabilization of Ukraine, the European Council (“Eu. Council”) did not wait too long to complete the puzzle. During the meeting held in Brussels on March 2015, the Heads of State and Government agreed on the fact that “the duration of the restrictive measures against the Russian Federation […] should be clearly linked to the complete implementation of the Minsk agreements, bearing in mind that this is only foreseen by 31 December 2015”. Following this statement, on 22 June 2015, the Council came to the decision, already introduced in this venue, to extend economic sanctions until 31 January 2016 and, on 21 September, to prolong asset freeze and travel bans against the person and entities gradually added in Annex I until 15 March 2016. Now, a careful analysis of the measures as of September 2015 might be helpful to predict their impact on present and possible strategies from both the EU and Russia.

1) Diplomatic measures

The diplomatic measures exclude Russia from bilateral and multilateral agreements with EU countries and therefore they constitute the political framework within the whole package of restrictions.

Through the Regulation 269/2014, the Council has cancelled the EU-Russia summit, suspended bilateral talks with Russia on visa matters, as well as on a comprehensive new Agreement that would replace the existing Partnership and Cooperation Agreement. On the wake of these first restrictions, the G7, together with the Presidents of the European Commission and the European Parliament reunited in The Hague on 24 March, decided to desert the G8 meeting to be held three months later in Sochi and to “meet again in G7 format” in Brussels, without Russia’s participation. Nevertheless, Russia had the possibility to take part to the G20 meeting held in Brisbane on November 2014, and still it might find open doors within future collaborations with the G7 leaders if willing to “change course”, as stated in the so-called “The Hague Declaration” .

The strategy behind this new diplomatic direction can be tracked from the analysis spread by the EP Directorate-General of external policies right after the Brussels summit, which outlines Russia’s position towards the G7’s revival. On one hand, the annexation of Crimea did not let Russia loose its stable hold on the other BRICS countries. The G7 needs to keep this factor in great account, not only in order to avoid polarizations in the G20, but also in the United Nations, International Monetary Fund and World Bank, where the BRICS have already jointly demanded more representation at the expense of the G7.

On the other hand, the G7’s revival would allow the EU to hold a key role at the G20 and to empower NATO’s joint security plans. Furthermore, in order to avoid the risk of polarization from the BRICS, the European Union is working to strengthen its diplomatic and commercial outreach to foreign partners. The EU leaders have followed this line during the Eastern Partnership Summit held in Riga on May 2015, and the EU Commission seems to be doing the same within the ongoing review of the European Neighborhood Policy (ENP).

2) Individual restricting measures

The Annex I of Regulation 269/2014 currently identifies 149 natural persons and 39 legal persons that undermined or threatened integrity, sovereignty and independence of Ukraine. According to Article 2, their funds and economic resources “shall be frozen” and their travels to the EU shall be banned until 15 March 2016, as agreed in September. The 2005 Council’s Guidelines provides and defines both measures. On one hand, the sanctioned persons and entities cannot dispose of their economic resources to obtain funds, goods and services, and neither can they enable their own funds, including portfolio management. On the other hand, travel bans prevent from entering or even transiting in any EU Member State, which are therefore not allowed to issue visas. It is crucial to notice how the Annex I hits also Putin’s “inner circle”, including personalities like Deputy Prime Minister Dmitry Kozak and senior Kremlin official Vladislav Surkov.

However, there are some exemptions related to sanctions’ capacity. As the 2005 Guidelines provides under letter e), a targeted individual might be exempted for humanitarian needs (for example, if she/he needs to pay for medical treatment) and, where applicable, for international obligations. For this reason and within the meanings of the 1961 Vienna Convention, diplomatic immunity shall stay untouched. Afterwards, Regulation 826/2014 added to the Annex I entities dealing with supplying to the Russian Army (such as Almaz-Antei), belonging to Russia’s financial sectors (Russian National Commercial Bank) and other key targets. As affirmed above, the individual sanctions fit in EU’s broader strategy against specific sectors of Russian economy.

3) Economic measures

The economic measures imposed from EU against Russia might be divided according to three main lines.

3.1) Restrictions on economic relations with Crimea and Sevastopol

With Regulation 692/2014, approved on June 2014, the Council forbids its members to import goods from Crimea and Sevastopol and finance the import of such goods. The Council further enhanced this measure on December 2014, by banning the export of a comprehensive list of goods, all investments in Crimea, even including tourism services supply. These measures are strictly related to EU Non-Recognition of Crimea and Sevastopol as independent States and, on June 2014, the Council extended them until 23 June 2016.

3.2) Restrictions against economic sectors in Russia

These economic sanctions are provided by Regulations that the Council approved on July and September 2014 and extended until 31 January 2016, namely as long as Russia will not align its policies with the terms provided in the “Minsk Agreement”. They mainly consist in five restrictions.

3.2.1) Restrictions on the access to the capital markets against “5 major Russian majority State-owned financial institutions and their majority-owned subsidiaries established outside of the EU, as well as three major Russian energy and three defence companies”, Council affirms. Among these institutions, there are the two major State-controlled banks (Vnesheconombank and Gazprombank), the State gas monopoly Gazprom and other institutes belonging to key sectors of Russian economy, some also linked to members of Putin’s “inner circle”. For instance, the largest single stakeholder of Bank Rossyia is Yuri Kovalchuk, which US Treasury considers “the personal banker for senior officials of the Russian Federation, including Mr Putin”.

3.2.2) Import and export ban on trade in arms and export ban on dual-use goods for military purposes to nine entities listed in the Annex IV of Regulation 960/2014 (8 September 2014).

3.2.3) Ban on providing services necessary for deep-water oil exploration and production, arctic oil exploration and production, or shale oil projects in Russia. This prohibition is inserted by Regulation 960/2014 as Article 3(a) of Regulation 833/2014 (31 July 2014): it does need the “prior authorization” to be required to the Council within the same Regulation for the export of certain technologies listed in its Annex II.

3.3) Restrictions on economic cooperation

This third system of economic restrictions is an outcome of a special meeting held by the Council on 16 July 2014. It consists in a delicate process currently involving the Europe-Russia commercial axis and, for this reason, no deadline has been set up for its implementation. First, the Eu. Council requested the European Investment Bank to suspend new financing operations in the Russian Federation, and let the EU Member States coordinate their positions within the European Bank for Reconstruction and Development “with a view to also suspending financing of new operations”. Moreover, the EU Commission has been invited to suspend EU-Russia bilateral and regional cooperation on a case-by-case basis, and to maintain only the projects related to cross-border cooperation and civil society.

In the end, it is possible to affirm that Libya and Syria are only two reasons in a long list which justifies why it is “crucially important” for EU and Russia not to shake their diplomatic relations. Following up what decreed by the Council in 2014, Moscow adopted countermeasures and banned the importation of some agricultural products, raw materials and foodstuffs from its sanctioning countries. The EU is Russia’s top trading partner and, undoubtedly, it suffers the most from both these countermeasures and its own measures as well. In 2014, total trade value with Russia fell by 13%, given that the Union provides to Russia more than 70% of the imports banned with the countermeasures, it imports 84% of its oil, and about 76% of its natural gas. Therefore, agri-food and finance are resulting the most affected sectors both in the EU and in Russia, and gas shall be too if the EU was not able to avoid excessive earthquakes from its on-going antitrust charges against Gazprom’s activities in West and Central Europe.

First, beyond the ban of some EU agri-food imports due to Russian countermeasures, the Ruble’s crisis in Russia strongly contributed in decreasing the imports also for those products not covered by the embargo, resulting in a vertical fall by 43% of the trade volumes between August 2014 and July 2015. This situation is likely to cause a boom in domestic Russian imitations of embargoed food (with a big damage to the image of EU products) but overall a great loss of jobs. Although the EU Commission has recently assessed that “in most regions, most of the affected sectors have been able to find alternative markets either within the EU or beyond”, an ING forecast indicated that 130,000 activities related to agriculture sector in Europe are still seriously threatened.

Second, the flight capital from Russia weakened further its purchasing power and exacerbated the Ruble’s crisis. Since the institute Open Europe estimates Russian companies to have more than $650 billion of foreign debt, any shock happening in Russia would have serious effects in the EU as well. Naturally, also here the burden of sanctions is not spread equally throughout the EU Members: Germany has the highest amount of risky investments with €75 billion worth of business in 2013, before the Netherlands (€37 billion), Italy (€30 billion) and Poland (€26 billion).

It is now easier to conclude what is “crucially important” in this event. It is important for the EU to safeguard its market while strengthening the research of alternative energy resources, and it is important for Russia not to overload its economic crisis and to restore the commercial scale with the EU. Everything goes through the stabilization of Ukraine and Ukrainian people, the only condition that everyone should seriously care of.