Thursday, July 31, 2014

EU, US, Russia: Update--The Jury is Still Out on Whether the US, EU Can Outlast Putin

According to Reuters, the European Union (EU) has published a law that will curb arms sales to Russia and to cut off financing for five major Russian banks over Moscow's support for rebels in Ukraine. 

Russia has denounced the measures, agreed by the 28 EU member states on Tuesday (July 30), as "destructive and short-sighted," while fighting has intensified in eastern Ukraine between Kiev forces and the pro-Russian separatists.

The toughest measures aim to prevent Russian banks from raising money on Western capital markets, while others limit defense sales and the export of hi-tech equipment for the oil sector.

Published on Thursday (July 31) in the Official Journal of the European Union, the law takes effect from Friday, August 1.

Marking a fundamental shift in how Europe deals with Russia, the sanctions will mean EU nationals and companies can no longer buy or sell new bonds, equity or other financial instruments with a maturity of more than 90 days issued by major state-owned Russian banks or those acting on their behalf.

The law targets five banks: Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB) and Russian Agriculture Bank (Rosselkhozbank).

In addition, there is a ban on any future imports and exports of arms from Russia, and authorization will be required for member states that want to export energy-related equipment.

Export licenses will be denied if products are destined for deep-water oil exploration and production, Arctic oil exploration or production and shale oil projects in Russia.

Europe, which has deep trade links with Russia, was far more reluctant to act than the United States over Moscow's annexation of Crimea from Ukraine in March and its support for the rebels. 

COMMENT: My personal sense is that the EU, given its having even a more fragile economy than the US, may or may not be able to hold the 28 members together in the long-term as in my view the economic sanctions are not vigorous enough to dissuade Vladimir Putin himself from long-term pain. It is my hope that I'm wrong.

The mood shifted radically after the downing over eastern Ukraine of Malaysian Airlines Flight 17 on July 17. Western countries say a Russian-supplied missile fired from rebel-held territory caused the disaster. Moscow blames the Ukrainian military for the crash, in which 298 people were killed.

The above being said, the downing of MH17 really hurt The Netherlands where roughly 50% of the fatalities were Dutch nationals. 

A ban on hi-tech energy equipment applies to the oil industry only, not gas, although the targeted banks include Gazprombank, which is 36% owned by Russian gas giant Gazprom.

The restriction on sales of defense equipment is limited to future orders. That means France will be allowed to go ahead with delivery of a naval helicopter carrier it has already sold to Russia, despite condemnation in many EU nations.

Russia is the world's biggest exporter of natural gas and second biggest of oil, and the state depends on energy for around half of its budget revenue. However, the EU also depends on Russia for roughly one third of its energy imports.

On the global oil market, crude imports from Russia can easily be replaced, but Russian gas delivered through pipelines is less flexible.

European Energy Commissioner Guenther Oettinger repeated in a German television interview on Thursday that Russia has as much interest as Europe in maintaining gas supplies to the EU because of its need for revenue.

The EU sanctions will be subject to a three-month review to assess whether they are achieving their aim of forcing President Vladimir Putin to "de-escalate" the crisis. 

Until this week, Europe had imposed sanctions only on individuals and organizations accused of direct involvement in threatening Ukraine, and had avoided wider "sectoral sanctions."