Is continuous sanctioning the way to resolve the Ukrainian crisis?

Vladimir Putin, Herman van Rompuy and José Manuel Barroso (in the foreground, from right to left) at EU-Russia Summit (28/01/2014, EC Audiovisual Services)

The E.U. together with the U.S. decided to impose harsher economic sanctions against Russia last Wednesday. This action was expected since Russia continued to further scale its violent military intervention in eastern Ukraine despite the warnings that were given by the U.S. and E.U.

U.S. sanctions focus on financial and energy sectors

The U.S. are taking advantage of what is happening in Ukraine and hence posing stricter measures against Russia. Those of course are meant to weaken the Russian economy and push away Russia from Ukrainian soil. The U.S. Department of Treasury is targeting not only individuals but entities in the financial services, energy and arms or related material sectors of Russia.

Starting with Gazprombank OAO and VEB, two major financial institutions, and continuing with the energy sector represented by OAO Novatek and Rosneft, the U.S. government is trying to “hurt” Russia. They intend to do that by preventing any American from providing new financing to those companies. Furthermore, eight Russian arm firms which are responsible for the production of small arms, mortar shells, and tanks were designated. Last but not least, four Russian government officials were added to the list of U.S. sanctions.

E.U. imposes less strict measures in fear of boomerang effects

Even if the E.U. is more economically close to Russia compared to the U.S., the Old Continent finally proceeded to a third and tougher round of sanctions. This was by all means reinforced by the U.S. pressure to European leaders to follow this policy. Russia through its foreign ministry accused Europe of “giving in to the bullying of the U.S. administration”.

However, Europe is not going to impose as strict measures as the U.S. did. More specifically, the E.U. officials stated that the measures will target “individuals or entities who actively provide material or financial support to the Russian decision-makers responsible for the annexation of Crimea or the destabilisation of Eastern-Ukraine”. Also, the European Council requested to suspend any new investments in Russia by the European Investment Bank. It is clear that these measures are much more vague and not as fierceful as the ones imposed by the U.S.. Does Europe fear that its economy will get even worse after these sanctions? It surely does. The E.U. is to a great extent “dependent on Russian fossil fuels”. The time that Europe will depend only on its own fossil fuels stocks has not yet come and this is clearly in favour of Russia and the U.S..

Will Russia fight back?

Russian Deputy Foreign Minister Sergei Rybakov responded in a statement saying, “We condemn those politicians and officials behind such actions, and confirm the internation to adopt measures, that will be received in Washington quite painfully and strongly”. Russia’s President, Vladimir Putin is ready to retaliate and stated that these measures will affect the bilateral relations and not only Russian but also American firms.

Sanction’s influence on Russian economy

The Russian benchmark MICEX dropped 2.44% upon news of the sanctions while OAO Rosneft and Novatek stocks fell by 4.45% and 5.09% respectively. That is a clear strike to Russian economy and to two of its biggest energy firms. Thus, we observe a direct impact from the very first day of the announcement of the imposed sanctions. It is logical because these measures are sectoral and companies’ effect is much stronger to the economy than individuals’ sanctions. The crucial point is how much and how long will Russia be influenced and if those sanctions will be enough to hold Russia back.

In any case, clearly sanctions cannot be the way to resolve this crisis; at least I hope and pray that our EU leaders have better things in mind too.