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Ukraine

EU and Russia on the brink of 'sanctions war'

The European Union could impose more sanctions on Russia in the very near future. Critics warn, however, that should the finance and energy sectors be affected, both sides will feel the consequences.

The European Union and Russia are on the brink of a "sanctions war" that could escalate into a major economic conflict. The first sanctions were already announced following the EU crisis summit on March 6. They include the postponement of ongoing negotiations seeking a more comprehensive basis for bilateral cooperation.

The EU will initiate a second stage of sanctions if Russia cannot be persuaded to form a contact group with other countries in the interest of solving the Ukraine crisis. Should this be the case, high-ranking Russian officials will face EU visa restrictions and their EU-based bank accounts will be frozen.

A long list of penalties is on the table. It is not yet known whether sanctions would only affect politicians, civil servants and military personnel, or whether they would be extended to Russian businessmen considered close to the Kremlin. What is not quite clear is the legal basis for freezing the bank accounts of these oligarchs.

The third stage of sanctions would enter into force if Russia undertakes any "further unacceptable steps" to destabilize the situation in Ukraine, EU leaders decided at their summit. In particular, this means possible Russian military actions in eastern Ukraine.

"That would lead to a far-reaching change in our relations with Russia, which can also contain a wide range of economic measures," German Chancellor Angela Merkel said in an address to the German parliament on Wednesday.(13.03.2014). Observers believe that this could mean a variety of sanctions, including a blacklist of Russian companies with which EU firms would be forbidden from doing business.

Russia would respond to sanctions

Merkel, Holland, Cameron, Tusk and Renzi sit around a table in Brussels. (Photo: REUTERS/Yves Herman)

Europe's heads of government met in Brussels to discuss the Ukraine crisis

In response, Russia has threatened to "seize property, assets and accounts of companies in the United States and the countries that adopt the sanctions against us," said Andrey Klishas, chairman of the Federation Council committee for constitutional legislation. Legislation was already being drafted, he said.

Russia could also cancel big contracts with European companies. For example, Moscow could drop its proposed purchase of French naval helicopter carriers.

"Sanctions against Russia are double-edged. France expects to earn one billion dollars for two Mistral-class helicopter carriers. Would it sacrifice this on behalf of an unreliable government in Kyiv?" the head of Russian parliamentary foreign affairs committee, Alexey Pushkov wrote on Twitter.

If the deal fell through, it would hurt French shipbuilders and arms manufacturers, as well as their European suppliers. At the same time, Russia would save a lot of money.

There is talk about an even bigger relief to the Russian budget - one that would come with a huge blow to Russia's image, however. Critics in the West don't want Russia to host the soccer world cup four years from now anymore either. The US House of Representatives has called on the International Football Federation (FIFA) to rethink its decision about the 2018 World Cup.

Energy from Russia

All these measures, however painful they may be to individuals or certain companies, would fade away if a "sanctions war" were to include two decisive sectors of the economy: energy and finance.

Opinions on the Russian oil and gas supply to the European Union are diametrically opposed. Some experts worry that Moscow could "turn off" the spigot for Europe's gas because the Kremlin is not amused about the sanctions.

Gazprom Logo. (Photo: Patrick Seeger dpa)

Some EU countries are dependent on Russian gas, others are not.

Others want to beat Russia to it and drastically reduce the import of energy from Putin's country in order to stop the flow of foreign currencies, which is vital to Russia's national budget.

One of the supporters of the latter opinion is Poland's Prime Minister Donald Tusk. He is calling for a revision of EU energy policy and asked Germany to "reduce its dependency on Russian natural gas." Otherwise, it would "limit European sovereignty," Tusk said.

Without a doubt, the European Union will try to reduce its dependency on the Russian energy supply in the medium term. But is Brussels able to take short-term measures?

Poland itself is a large recipient of Russian energy. According to experts from the US bank Morgan Stanley, Finland, Estonia, Latvia and Lithuania also depend almost exclusively on Gazprom deliveries. At the same time, the experts say that many western European countries buy little to no Russian gas. In other words: parts of the EU could end energy relations with Russia immediately.

Money, money, money

In the world of finance, Russia and the West are also bound in mutual dependency. Russian companies and banks, including state-owned businesses like Gazprom, Rosneft, Sberbank and VTB, owe more than 650 billion dollars to their creditors. That is a lot more money than Russia's foreign currency reserves hold. They have shrunk to 493 billion dollars since the end of February.

Should Russian businesses stop paying their bills for political or economic reasons, American, European and Japanese banks and investment corporations would feel the pinch. But it would also be seen as the Russian partners' factual declaration of bankruptcy. As a consequence, system-relevant Russian companies would be cut off from the capital markets for years. That would be the kiss of death for their domestic and international investment plans and it would have devastating effects for Russia's economic growth.

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