Photo: Antoine Antoniol/Getty Images
Europe's Fears About Sanctioning Russia Are Overblown
Ukraine

Europe's Fears About Sanctioning Russia Are Overblown “Russia’s economy would collapse faster and quicker.”

By Photo: Antoine Antoniol/Getty Images

Over the weekend, the European Union named the next set of Russians and Ukrainians it was not going to allow onto its territory, and it was a doozy as far as European lists go. Banned from holding assets in and traveling to the E.U. were the head of the FSB, Alexander Bortnikov; the head of Russia’s foreign intelligence, Mikhail Fradkov; and the young sociopath who runs the Chechen Republic, Ramzan Kadyrov. If the U.S. has been going for the cronies and childhood friends surrounding Russian President Vladimir Putin, the Europeans targeted the hardliners that have been instrumental in pushing Russia into its newfound status as geopolitical pariah.

But it took the Europeans four months to get here. Four months since Russia unilaterally decided that part of a sovereign country was actually misplaced Russian territory, four months since Russia launched a second non-invasion invasion of Ukraine, four months of constant pushing by the Americans. Moreover, Europe did not go as far as the U.S. in that it did not sanction any Russian banks or defense companies. 

Why? 

The conventional wisdom is that Europe is more interconnected with Russia economically, and more dependent on it for its energy supplies. Therefore, if Europe were to impose tougher economic sanctions on Russia, there would be blowback and the European economies would suffer, setting back Europe’s fragile recovery. This would happen either because Europe would cut itself off from doing business with Russia or because Russia would cut off Europe’s energy supply.

But is that really true? Is Europe really so dependent on Russia for its economic well-being?

People inside the Obama administration contend that it is not. “I think that the Europeans do need to recognize that Russians have more to lose than they do,” says one senior administration official. Another told me he thinks the Europeans are greatly overstating their interdependence with Russia and the pain they would feel. The Europeans, meanwhile, publish all kinds of flow charts in their newspapers showing just how much money flows hither and thither to prove their point.

The truth, as always, is somewhere in the middle.

If Europe keeps itself from doing business with Russia in certain realms, it doesn’t necessarily mean a death spiral for the entire European economy. “Russia imports $300 billion worth of goods from Europe,” says Chris Weafer, a Moscow-based consultant for Macro Advisory. “That’s not a killer in terms of European economy, but a killer for those specific industries.”

In other words, given the size of the E.U. economy$17 trillion in 2012$300 billion is not all that much. It is a lot, though, for those specific sectors that do a lot of business with Russia. For example, German car manufacturers. Russia is their second-biggest market. If sanctions get in the way of that, German autoworkers are out of some jobs. Or if E.U. sanctions affect defense contracts, French workers building Mistral warships (for which Russia has already paid $1.1 billion) will also find themselves out of a job, and possibly striking. If Russia cuts off titanium exportsit is the world’s largest producer and the best at machining the partsAirbus and Boeing have to stop building Dreamliners and double-deckers.

Countries like Bulgaria and Italy who are reluctant to hit Russia harder are involved in building the South Stream gas pipeline and also see a lot of revenues from Russian tourists. Bulgaria is especially vulnerable: 70 percent of its tourists are Russian. The U.K. financial industry launders a lot of Russian cash, so they are understandably reluctant to voluntarily plug up that flow. Cyprus is in a similar situation, both with Russian tourists and Russian offshores.

“A lot of jobs would be affected, but the macroeconomic effect is less than is often claimed,” says Cliff Kupchan, head of the Russia practice at the Eurasia Group.

Russia, on the other hand, is highly dependent for more than just carsthough that is crucial to the Russians. Russia is dependent on Europe for 40 percent of its food and medicines. Also, if Europe bans the export of high-tech oil technology as it is now poised to do, it will significantly hamper the development of the Russian Arctic, which holds up to 30 percent of the world’s known gas reserves. Russia simply can’t do it without Western technology, at least not on the timeline it has set out for itself.

Many of the figures showing overall economic trade between Europe and Russia don’t break it down into what each side contributes, and about half are Russian exports of energy to Europe. “Germany has a $90 billion trade turnover with Russia, but half of that is gas,” says Kupchan. “It’s not overwhelming.”

This cuts both ways. Yes, Europe is highly dependent on Russian oil and gas. The Union-wide average is 25 percent, though some countries get as much as 100 percent of their energy from Russia. The energy question, and whether or not Russia would turn off the tap, is the key question. It would be the only way that Russia could really punish Europe and affect it all across the board.

But it’s not like Russia is just handing over the oil and gas for free. In fact, Russia is highly dependent on the money it gets from Europe for that oil and gas. As my colleague Danny Vinik has pointed out, “Oil and gas revenues make up more than 50 percent of the Russian government’s total revenue, most of it coming from Europe. If the Eurozone nations decided to reduce or end their purchases of Russian oil and natural gas, it would leave a massive hole in the nation’s budget.” If you add Russian metals and wheat exports, the Russian economy is 85 percent export-based.  

Which is why most analysts agree that, if Europe and Russia both took the nuclear option in terms of trade sanctions, both sides would suffer but Europe would fare much better than Russia. “Russia’s economy would collapse faster and quicker,” says Weafer. “It would have an immediate impact on budget, and on food. The Russian economy would be in dire straights very quickly.”

This is also why most analysts will confidently tell you that Europe’s fear that Russia will turn off the energy tap is completely overblown. “Russia’s not going to cut of gas to Europe,” says Kupchan. “That would hurt Russia too much.”

But, as we know, assuming that Russia is a rational actor, carefully weighing the economic consequences of its geopolitical games is, all too often, a foolish assumption. Russia has shut off the gas before, in its so-called “Gas Wars” with Ukraine. Back then, Russia was trying to exert pressure on the government in Kiev, but it was winter and it affected customers in Germany and the Czech Republic. Russia didn’t care. In the summer of 2008, as the Russian economy began to wobble and things with Georgia began to heat up, Western analysts said that Russia would never go too far in its fight with Georgia because of the negative economic fallout it would bring. By August, Russian tanks were bearing down on Tbilisi and when the economic crisis inevitably hit, the Russians blamed Lehman Brothers. In the current crisis, as Ellen Barry has reported in the Times, technocrats and economic liberals as well as businesspeople who have something to lose from a worsening relationship with the West have been systematically sidelined by the Kremlinand the men sanctioned by the EU over the weekend.

Which appears to be the calculation Europe is actually making: Russia would suffer more from European sanctions and would probably not sever energy exports to Europe because it is itself so reliant on them. But you can never be optimistic when it comes to dealing with Russia. “Who the hell knows what Putin’s going to do?” says Kupchan. “There’s the bolt out of the blue factor. Putin has a long history of brash and breathtaking actions. We all have to know that this is a bold guy and it raises the stakes even higher.” 

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