Sanctions Have Not Been So Bad

With sanctions regime being present since 2014, Russia’s relations with the United States and the European Union have not been easy. Previously, the EU has been mostly in line with sanctions proposed by the US. Taken the possibility of new sanctions being imposed on Russia by the US, it is the European view that is worth looking at. Dr Richard Connolly, Associate Fellow for Russia and Eurasia Programme at Chatham House (UK) shares his thoughts on economic ties between Russia and the European Union.

With sanctions regime being present since 2014, Russia’s relations with the United States and the European Union have not been easy. Previously, the EU has been mostly in line with sanctions proposed by the US. Taken the possibility of new sanctions being imposed on Russia by the US, it is the European view that is worth looking at. Dr Richard Connolly, Associate Fellow for Russia and Eurasia Programme at Chatham House (UK) shares his thoughts on economic ties between Russia and the European Union.

chathamhouse.org
Richard Connolly

How do you think will possible new US sanctions affect economic ties between the EU and Russia?

In this case we can only guess. If we look at the evidence from the last few years there has been deterioration, of course, in those sectors, which were targeted by sanctions. In the first year or two since then, both sides have adjusted largely. And I doubt whether EU–Russia economic relations will get significantly worse if the US decides to impose sanctions. If anything, that might cause greater EU–US disagreement on the sanctions regime. For the EU, it’s focused purely on Ukraine and the implementation of Minsk II. For the US, it’s focused on the alleged interference in elections and for other purposes. There’s also a perception among German, French, and Italian industrialists that US sanctions policy at the moment is not just an instrument of foreign policy, it’s also an instrument of industrial policy. It’s aimed not just at causing problems for Russian producers of goods, but also at making European producers of some industrial goods less competitive than the US ones. And I think there’s a perception within certain European firms and business circles that the US interests lie just in that. So my suspicion is that if the US proceeds unilaterally with sanctions and seeks to affect European Union policy, the European Union will probably say, “We’re focusing only on Minsk” — they’re not going to attack sanctions — and that may also cause tensions between the two.

Assuming that the oil prices don’t go down, — which they have been for the last few days caused by a downturn in US stock markets — and gross levels continue on their current course, I would expect EU–Russia investment and trade to grow, not shrink.

Who do you think suffers from sanctions more: Russia or the EU?

Ivan Timofeev:
US Sanctions against Russia: The Forecast for 2018

I think both sides like to overstate the other side’s weaknesses. That’s politics, and in a sense, it’s normal. If we look at European Union member-states’ firms, certainly some sectors were affected. If you’re a producer of dairy products or meat, like pork sausages in Poland or in the Baltic states, then you would suffer significant reduction in sales. And that might have affected some individual farmers quite a lot. However, I’ve also read reports in the Russian press which will say, “Oh look, X amount of thousand German jobs have been lost”. But I’m sure that German, Italian and French sales of certain goods went down primarily due the decline in oil prices. The rouble depreciates, which means that Russians buy fewer European goods. That, I think, was the main factor rather than sanctions. Moreover, decline in sales doesn’t mean that people automatically lose their jobs. Their sales might go down and they may seek out alternative markets elsewhere — maybe they just have low profits for that year. I think that the notion that sanctions have caused tens of thousands or hundreds of thousands of jobs losses — which I have read in the Russian press — is probably overstated.

But similarly, in certain EU countries and in the US, politicians over there will say that Russia’s economy is in tatters and it’s because of sanctions (the way Barack Obama put it). I don’t think that was true, either. Politicians will always exaggerate the impact of their policies. What I do — I’m not here to articulate the views of a member-state — is just look at the data, and the data suggests that sanctions impact has not been as bad on either side. I think both sides have adjusted to a certain degree and sought out new markets. Of course, there have been losses, there has been some pain on both sides, but it’s slowly getting better.

What prospects do you see for our economic ties, maybe in the energy sphere as well, given the circumstances we are living in?

Igor Yushkov:
Sanctions vs. Cheap Oil: What is More Dreadful for Russia’s Fuel & Energy Complex?

For European Union countries, one main point is that they’re a net energy importer. The EU is the largest net energy importer in the world, bigger than Japan and China. Its production is scheduled to go down and its consumption is projected to rise. So it will need to fill that gap — that growing deficit — with energy from somewhere else. Now, of course, people are talking about diversification, about seeking out new supplies in the Middle-East or North America. However, I think the thing about Russia is that it provides oil and gas — particularly gas — cheaper than the alternative exporters. Pipe-lined gas is cheaper than LNG [liquified natural gas] from Qatar or the United States. So my suspicion is that on the trade front, we’ll get closer. Again, I speak only by looking at the data: Russian exports have been growing, to record Soviet and post-Soviet rates, and they could grow even more.

In terms of investment, I don’t know if the prospects are as good. I think what has happened in the last two or three years is that a lot of Russian energy firms have started to make deals with Chinese, Indian, Asian and Middle-Eastern firms and governments, more than they have done in the past. And previously, these were with the US and EU firms, who dominated investment streams in Russian energy, but now they’re facing competition from other parts of the global economy. This means that it’s not that we won’t be investing more, the process will just be more competitive. That’s good for Russia, because there are more options, but European firms realise that there aren’t many countries in the world with natural resources like Russia where the possibilities for investing are as great. Still, they are facing more intense competition due to the changes in the global economy — Chinese firms are competing now in nearly all sectors, including energy.

Interviewed by Maria Smekalova.