Three years in: Status of the EU sanctions against Russia

EU Member States are debating whether the economic sanctions imposed on Russia have achieved their goals, whether they have failed, and whether it is time for them to be lifted. Anahita Thoms and Lukas Bauer examine the arguments.

For many western countries, economic sanctions have become a primary tool to address global crises, a coercive measure for achieving particular policy goals related to international law violations. Generally speaking, the goal is to not only express dissatisfaction with the target’s policies, but also to prevent the target from repeating its action and forcing it into changing its behaviour. In the case of Russia, the United States and the EU, alongside important allies such as Australia, Canada, Japan and Switzerland, joined forces and implemented economic sanctions in response to Russia’s annexation of Crimea. The goal, inter alia, was to restore Ukraine’s territorial integrity, to de-escalate the crisis in Crimea, and achieve stabilisation in the region. Unlike the economic sanctions against North Korea, the measures against Russia have not been designed to isolate Russia from the West, but to have a quick – sectorally targeted – economic impact on Russia.

EU Member States are debating once again whether the enacted economic sanctions achieved their goals, or whether they have failed and should be lifted, in the case of Russia. Now, three years into the Ukraine crisis, the status of the sanctions against Russia will be reviewed, first by summarising the means the EU employed in its economic sanctions programme and then by assessing the current short and potential mid- to long-term effects of the sanctions.

Summary of the economic sanctions against Russia

First implemented in March 2014, the EU sanctions have been steadily accelerating in intensity as the East- Ukrainian crisis has escalated. At first, they remained limited to asset freezes and visa bans. Yet, after the downing of Malaysian Airlines Flight MH17 in Donetsk, the EU decided to adopt a significantly more far-reaching sanctions regime: The so-called sectoral sanctions, enacted on July 31 by means of Reg. 833/2014. In essence, it contains various restrictions on dual-use goods, arms, goods suited to the oil industry, and restrictions on Russia’s access to the capital market. This programme of sanctions was designed to curtail foreign investment in, and trade with, Russia, as well as to bring Russia and Ukraine to the negotiating table. Inter alia, restrictions were implemented on:

(a)loans or credit of longer than 30 or 90 days maturity, or transferable securities, or money market instruments issued after the sanctions were imposed in 2014, by or for: (i) Sberbank, VTB Bank, Gazprombank, Vnesheconombank (‘VEB’), Russian Agricultural Bank, or their subsidiaries; (ii) Rosneft, Transneft, Gazprom Neft or their subsidiaries; (iii) Oboronprom, United Aircraft Corporation, Uralvagonzavod, or their subsidiaries;

(b)exports from the EU of certain items for upstream oil and gas applications or related brokering or assistance, to anyone in Russia or for use in Russia, including its Exclusive Economic Zone and Continental Shelf; a prior authorisation is required for the export of items suited to oil exploration or production in waters deeper than 150 metres, in offshore areas north of the Arctic Circle, or in in shale formations by way of hydraulic fracturing;

(c) provision by EU persons to Russia including its Exclusive Economic Zone and Continental Shelf of certain services (such as drilling, well testing, logging and completion services) necessary for such deep water, arctic or shale oil exploration or production;

(d)exports and related assistance from the EU of certain items for military use in Russia or to Russian military end-users.

What has been the impact of the sanctions?

While it is difficult to disentangle the effects of the multilateral sanctions against Russia from those resulting from the falling price in crude oil and the decline in the rouble’s value, Russian sanctions have had an impact on the Russian financial, energy and defence sectors, including the following short and medium-term effects:¹

Short-term effects

Financial sector
Prior to EU sanctions, approximately 75% of foreign direct investment and foreign loans to Russia’s economy originated in the EU. EU sanctions, in particular the financing restrictions on Russia’s five largest banks (see above), dramatically curtailed EU investment and western lending since mid-2014. Simultaneous repayment of foreign debt and massive deposit withdrawals by Russian customers subsequently led to a 2.34 trillion rouble (U.S.$35bn) anti-crisis spending plan (including a 1 trillion rouble bailout programme for major banks and 0.5 trillion rouble to fund loans to Russian companies).

Loss of EU grants and loans
In July 2014, the European Bank for Reconstruction and Development (‘EBRD’), one of several multilateral development banks, and the European Investment Bank cut Russian investments significantly and put new financings on hold.

Decline of EU exports to Russia
Russia ranks as the EU’s third-largest trading partner. As a result of EU sanctions, however, Russian counter- sanctions (see below) and recession in Russia, trade volume (and in particular European exports to Russia) decreased significantly (about 12-14.5% in 2014).

Energy
Although one of the key targets of the EU sanctions was Russia’s energy sector, the EU sanctions appear to have had no significant short-term impact on Russia’s energy sector. While gas production and exports have slowed slightly, oil output has surged, although oil revenues have plunged due to dropping crude prices.

Medium-term effects

Financial sector
Of all the western sanctions, thefinancial restrictions have hit Russia the hardest and largely alienated the country from the West’s financial markets. Russia’s Ministry of Finance recently struggled to locate western banks willing to participate in issuing a U.S.$3bn Eurobond (Russia’s first attempt to regain access to capital markets since sanctions were imposed). Russia has scouted for alternative foreign funding sources and deepened financial ties to China. Currently, it is preparing to issue renminbi-denominated sovereign bonds (and raise U.S.$1bn) and discussing plans to link China’s national electronic payment network to its own credit card system. Russian companies (such as Gazprom) have also secured financing from Chinese lenders.

Energy sector
The longer the sanctions remain in place, the harder it will be for Russia to maintain its oil and gas output. Exploring offshore and other technically sophisticated fields may become more challenging without innovative western technology and knowledge. However, it bears noting that cooperation between Russian and western energy companies continues in areas not targeted by sanctions, as evidenced by the gas pipeline project Nordstream 2, oil field development taking place below the Arctic Circle, and various other offshore ventures.

Defence sector
While Russia’s arms exports are not heavily influenced by western sanctions (neither the EU nor the U.S. are important Russian arms custom- ers), the Russian defence industry is to a considerable extent dependent on western technology and spare parts: a majority of electronic components used in Russian armaments are of western origin. Maintaining the level of quality and production quantity while not having access to European technology may pose a challenge for the Russian defence sector.

Conclusion

Over recent years, the EU has increased the use of sanctions to reach its foreign policy goals. The EU Member States, the U.S., Japan, Australia and Canada remained united and sanctioned Russia gradually by targeting its most important economic sectors: finance, energy and defence. However, the question remains: Did the West’s sanctions against Russia work? At least for the time being, Ukraine’s instability has been geographically limited. Additionally, it is beyond dispute that the Russian economy has suffered in the past three years. This is not only because of the sanctions, but also because of the falling price in crude oil and the subsequent decline in the ruble’s value. The economic effects are hard to disentangle from other macroeconomic developments. It is difficult to predict the long-term effects of the sanctions.

In the meantime, Russia showed reactions to the sanctions: counter- measures against the West were taken. Russia is increasingly looking east, in particular collaborating with China, from gas deliveries worth hundreds of billion US dollars to major infrastructure programs. And: While the Minsk Protocol and Minsk II brought Russians and Ukrainians back to the negotiating table, the crisis in Ukraine is as far from being solved as ever.

This article is reprinted from the June 2016 issue of WorldECR, the journal of export controls and sanctions.

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