• Damaged brand? (Photo: Mitya Aleshkovsky)

Analysis

Leaked paper: EU options on 'stage three' Russia sanctions

22.07.14 @ 20:42

  1. By Valentina Pop and Andrew Rettman

BRUSSELS - Even before the MH17 disaster, EU countries were discussing a potential ban on Russian oil and gas imports if worst comes to worst.

A text, drafted by the European Commission in late April, outlines what the EU is calling its “stage three” sanctions.

It is entitled: “Assessment of the potential impact of restrictive measures towards Russia on the economy of the EU and its member states”.

A two-page segment of the paper, seen by EUobserver, describes three options.

Low-intensity

The first, a “low-intensity” scenario, contains seven steps.

They include: “restrictions” on imports of Russian “luxury goods (diamonds, precious metals, furs, vodka and caviar) and of food products”; restrictions on “selected … intermediate and processed goods (fertilisers, chemicals, tyres, vessels” but not “steel or nuclear components”; restrictions on “imports and exports of arms”; and restrictions to “export financing” for the listed industries.

They also include: blacklisting more Russian individuals and some companies; suspending EU grants for Russia projects; and stopping loans from the European Investment Bank.

The latter three measures were agreed by EU countries last week before MH17, in what some diplomats at the time called “stage 2.9 sanctions”.

The additional names on the blacklist are to be published by the end of the month.

Medium-intensity

The “medium-intensity” scenario designates eight more steps.

They are: a ban on imports of all intermediate and processed goods; a ban on imports/exports of “all sensitive technologies and dual use and arms”; blacklisting still more Russian individuals; “restrictions” on “trade and investment and related financial services”; restrictions on “free movement of capital”; restrictions on “maritime and road transport (not air transport)”; “holding up Russian investment/acquisition in the energy sector”; an “import ban on coal (no ban on electricity)”; and “cancellation of all co-operation activities”.

While France’s plan to deliver a “Mistral” warship to Russia in October has attracted attention, the ban on “dual use” items could hurt more.

According to Igor Sutyagin, a Russia specialist at the Rusi think tank in London, France makes gun sights for Russia’s leading tank, the T90, while European firms Thales and Eads make components for Russian spy satellites.

According to IHS Jane’s Defence Weekly, a British consulting firm, France also sells avionics for Russian MiG jets and “electro-optic infrared” technology, used in surveillance and targetting, for Russian tanks and helicopters.

Also before MH17, the EU already hit Russian energy sector investments by forcing Bulgaria to halt construction of the South Stream gas pipeline.

Following MH17, the EU on Tuesday (22 July) threatened to impose sanctions on “capital markets, defence, dual use goods and sensitive technology including in the energy sector” unless Russia stops destabilising Ukraine and lets international air crash investigators do their work.

High-intensity

The commission’s “high-intensity” option contains five steps.

It calls for: “capital market restrictions”; “prohibition of new investment in Russia”; “strict application of EU regulatory rules to Russian assets in EU companies”; an “import ban on gas”; and “an import ban on oil”.

Putting the oil and gas ban in perspective, according to US figures the EU buys 84 percent of Russian oil exports and 76 percent of its gas exports.

A back-of-the-envelope calculation indicates an EU ban would make a $300 billion hole in Russia’s $420 billion annual budget.

With some large EU countries, including Germany, Italy, and Poland, dependent on Russian gas for at least one third of their needs, it would also shock the European economy.

The commission paper says EU officials carried out macro-economic impact assessments for each member state. The results were sent in a “country fiche” to each capital.

Much is likely to have changed since the text was drafted in April.

The paper notes that the sanctions proposals are being “tested” vis-a-vis member states’ feedback, so that the options text is, at any given time, a “work in progress”.

There is also likely to be devil in the detail.

When the US imposed economic sanctions on Russia last week, it put a trade ban and asset freeze on eight Russian arms firms.

But it imposed a ban-lite on four Russian energy firms and banks, which prohibits only the issuing of long-term debt (90-day or longer bonds) to the companies concerned.

An EU official told this website some Russia arms ban options target only new export licences, allowing France to deliver its Mistral.

One sign the EU is getting serious came at last week’s summit, however.

From bark to bite?

In an aside, commission chief Jose Manuel Barroso told press his energy department is doing “stress-tests” on how EU states could cope without Russian gas, with results due in October.

A US source who helped prepare the American sanctions told EUobserver that Washington is planning to go further.

"These [the US sanctions so far] seem more designed to quiet critics than inflict real damage. Even so, we're firmly on the pressure track and will see further escalation. August looms and Russia will be about the business of establishing facts on the ground [in Ukraine] before we take another whack", the contact said.

Western bans on Russian financial and energy sectors, if imposed, would put Russia somewhere between North Korea and Iran in terms of pariah status.

Russian leader Vladimir Putin is wooing non-aligned states to hedge his bets.

But with dozens of MH17 victims coming from Indonesia, Malaysia, and the Philippines, Asia might be less willing to roll out the red carpet.

For its part, the Ukrainian embassy to the EU, in a letter sent to the EU foreign service on Monday and seen by this website, added ideas on how to increase the political pain.

It said Italy should uninvite Putin to a summit of Asian and European countries in Milan in October.

It said the EU should encourage Australia, which also lost people in the air crash, to uninvite him to a G20 summit in November.

It noted that the “Donetsk People’s Republic” and “Luhansk People’s Republic” - the Russia-controlled breakaway entities in east Ukraine - should be listed by the EU as “terrorist organisations”.

It also recommended an EU “reconsideration of Russia’s right to hold the next Fifa world cup in 2018”.