Sanctions. EU/US Rift

As the crisis in the Baltic lingers on and regretfully shows no signs of abating, the political fallout, which is manifesting itself in the form of sanctions, is resulting in a European Union (EU) political agenda, which is increasingly becoming more at odds with the bloc’s economic agenda. Perhaps it is no surprise then that EU officials were dragging their feet over US’s enthusiastic insistence to ratchet up the sanctions against Russia over the Baltic crisis. 

The EU, after all is tinkering on the brink of a political and economic abyss. Germany, the engine of Europe is in economic stagnation and a lengthy period of low real wages has meant that domestic demand has been feeble so it desperately needs those exports to Russia. The peripheral countries are mired with mass unemployment and growing wary of a Brussels’ imposed austerity. 

The latest round of sanctions on Russia, which is now coming into force have in their gun sight three main sectors of the Russian economy. Indeed, finance, energy and the defense sector have all been targeted by the new sanctions on the Russian economy. Sberbank, Russia’s largest bank along with three other big titan banks, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Russian Agriculture Bank (Rosselkhozbank) have all come under fire as a result of the new sanctions. Russia’s main banks have been banned from raising capital on the EU’s capital markets. Moreover, loans exceeding 90 days and the selling of bonds to European investors has also been banned. The sanctions targeting banks, with a state ownership of over 50 percent was implemented on August 1 and will be valid for one year. The decision whether to lift or implement harsher sanctions on Russia is expected to be reviewed after three months. “In order to restrict Russia's access to EU capital markets, EU nationals and companies are no longer permitted to buy or sell new bonds, equity or similar financial instruments with a maturity exceeding 90 days, issued by major state-owned Russian banks, development banks, their subsidiaries outside the EU and those acting on their behalf. Services related to the issuing of such financial instruments, e.g. brokering, are also prohibited,” said the EU Council in a statement. 

Reaction soon followed from Russia’s biggest bank. Playing down the sanctions a spokeman for Gazprombank said in a statement that “the measures taken by the EU are almost the same as those imposed earlier by the US” and added that the new sanctions will not have an effect on the bank’s financial stability and work. The local press reported that the bank continues to operate as usually providing services to both individuals and legal entities and transactions both in rubles and foreign currencies proceed without delays. “In these circumstances, Gazprombank continues to completely fulfill its liabilities to investors, depositors and creditors,” the statements published on the bank’s website reads. 

However, VTB Bank was more scathing of the sanctions. VTB said that it strongly disapproves of the EU’s
decision, adding that the bank and all its subsidiaries will continue to operate as usual. “Such actions contradict Europe’s democratic values, showing they have gone against their own interests to do the bidding of their senior colleagues from across the ocean,” the bank said in a statement. “These decisions are incompatible with the core principles and values of the free market, and discriminate against VTB as well as international investors. European authorities have de facto granted themselves the right to decide for investors where they may invest their own funds.” 

With regards to the energy sector, any EU company wishing to provide heavy equipment or technology to Russia will now need to have it approval by officials. The continued exploration of oil in the Arctic might be affected by these new round of sanctions imposed on the Russian energy sector. The defense sector has been slapped with a ban of imports and exports to Russia; however that will not be retroactive. So any military sales of equipment that were authorized prior the ban will be allowed to proceed.

Moscow has slammed the latest round of sanctions saying it was disappointed by the EU’s inability to act independently from the US in the international arena. “We feel ashamed for the EU who, after long searching for a unified voice is now speaking with Washington’s voice, having practically abandoned basic European values, including the presumption of innocence,” said the Russian Foreign Ministry in a recent statement. 

Indeed, the world’s only super power is now starting to flex its muscles again and reminding Europe who’s boss. Is it plausible to believe that France’s decision not to revoke a multibillion euro military naval ship deal with Russia might have been a reason behind the French banking giant BNP Paribas being bullied with a record 6.6 billion Euros penalty for violating US sanctions? It’s worth noting that when the British HSBC violated sanctions and even dealt with UN recognized terrorist organizations and was fined 1.9 billion USD, which hardly sized up to the whopping 6.6 billion imposed on the French bank. 

Moreover, these US instigated sanctions on Russia, which are designed to damage, will probably also hit hard the engine of Europe. German exports to Russia, are worth 36.1 billion Euros and this is something that Germany cannot jeopardize, particularly when growth is stagnant. 

Russia is firing back with its round of sanctions. Putin has warned that EU sanctions will cause energy price increases in Europe. Additionally, EU banks working in Russia could also be targeted in future. Russia’s food safety agency said it may ban imports of U.S. poultry and some European fruit due to contamination of the products, according to a recent Bloomberg report. Russian Deputy Prime Minister Dmitry Rogozin said last week that Russia has the capability to build Mistral-class helicopter carriers on its own if France cancels the existing contract. 

So not only could these sanctions imposed on Russia over the ongoing crisis in the Ukraine have adverse effects on a global scale, according to the IMF but they could also create a rift between the EU and the USA. If history repeats itself then we are in worrying times; in the past there were currency wars, which led to trade wars and then real wars.