Who is to lose from the 6-month extension of the EU economic sanctions against Russia?

Ms Federica MOGHERINI, the High Representative of the EU for Foreign Affairs and Security Policy, at 3400th Foreign Affairs Council (TVnewsroom European Council, 22/06/2015)

The European Foreign Ministers gathered in Luxembourg two days ago and decided to continue imposing economic sanctions to Russia for another six months. This shows the strong intention of Europe to weaken Russia’s power in Ukraine and thus put a stop on Russia’s imperialistic plans.

However, Russia claims these sanctions as “illegal and unfounded” and will fight back extending the ban on food and agricultural products that was imposed to the EU imports. The latter will have a great economic impact to the EU but Russia may have to reconsider excluding certain countries (e.g. Greece) with which Russia is lately getting very close to.

The fact that the pro-Russian separatists continue fighting in Eastern Ukraine supports that Russia considers this part as strategically important for its expansion and will do whatever it takes to keep it under its rule. What will influence the on-going situation is whether the West will continue imposing economic sanctions, the role that European countries like Greece can possibly play and Russia’s expansion further to the East.

EU expands sanctions on Russia

Without second thoughts, the EU Foreign Ministers convened in Luxembourg and came to an agreement to expand until January 31 the economic sanctions against Russia. The reason was obvious. Russia has not yet committed to the plan of cease-fire and peace signed by Kremlin in Minsk last February. It is apparent that Russia keeps on claiming Eastern Ukraine at the time that pro-Russian separatists continue fighting against Ukrainian forces.

The sanctions focus on certain exchanges with Russia in the financial, energy and defence sectors as well as dual-use goods. First, dual use goods and military technology exports in Russia are prohibited. Secondly, energy-related equipment that will be used for deep water oil exploration and production, arctic oil exploration or shale oil projects in Russia will not be exported. Thirdly, the EU sanctions cover an embargo on the import and export of arms that are listed in the EU common military list. Last, EU nationals and companies cannot provide loans to five-major Russian state-owned banks.

The two sides of rouble

It has been over one year now that the EU is imposing restrictive measures against Russia due to the escalation of the Ukrainian crisis and as an outcome we monitor that the Russian economy has been affected and slighted into a recession with the rouble and oil prices falling at very low levels. Those long-term measures have made Russia change its economic policies and target even more towards the East.

Thus, the search of Russia in currently finding alternative allies and business partners has proven constructive. China is one of the countries to substitute Europe. Russia has already signed a $400 billion energy deal with China that will start delivering as of 2018. China will import more Russian gas compared to Germany which means that Russia will be benefited in the medium and long-run with more agreements to be ready to be signed between the two vast countries. Apart from China, Russia recently signed an agreement with Greece for the creation of a joint enterprise that will construct the Turkish pipe line in Greece. The project will be concluded by 2019 and will cost 2 billion euros and is estimated to significantly increase Russian gas exports.

Another positive sign for the Russian economy, according to a top Russian official, is that the imposed sanctions have forced domestic production to increase in order to replace imports from the EU. More specifically, Alexander Brechalov, Russian Public Chamber Secretary, stated according to the Russian outlet TASS:  “Extension of sanctions by our Western partners is only positive for us so far. The longer the sanctions stay in place, the better it will be for businesses, especially those operating in the sphere of import substitution. Obviously, the process of import substitution is underway. Businessmen have felt chances and possibilities.”

Who will be the winner

The West (EU and US) has showed that is determined to drive Russia away from its economic growth. Even if Europe is not at its economic peak, it always remains a very strong contributor to the country in terms of gas and oil. By alienating Russia from the European and Western markets in general has as an outcome to push Russia further to the Eastern ones.

All in all, nobody can estimate at this point who will be the winner in this sanction “battle”. The European Sting will follow the matter closely to see evolutions on the matter hoping that stability in the region will be somehow ensured.

Follow Chris on Twitter @CAnyfantis

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