Wednesday

16th Oct 2019

Analysis

EU sanctions on Russia hurt more than it seems

  • Putin (r) in Brussels - the Russian chief is said to have a 'lowered sense of danger' (Photo: ec.europa.eu)

“Sometimes a stick in the air is better than a stick on the head”.

Words of wisdom from Avi Dichter, a former chief of Israel’s internal intelligence service, the Shin Bet, who knows a thing or two about psychological warfare.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

He was speaking in Brussels - at the outset of the Syrian war - on the deterrent effect of potential EU sanctions.

The EU "sticks" did nothing to help.

But the Western stick over the head of Russian leader Vladimir Putin is heavier and east Ukraine is not Syria: Putin can switch off the killing. He does not face an existential threat if he does.

The EU has been playing psychological games with the Kremlin for the past three months.

Following MH17, the stick - the threat of economic sanctions - is poised to strike a blow on Tuesday (29 July) against Russia’s “access to capital markets, defence [contracts], dual use goods, and sensitive technology including in the energy sector”.

It is likely to disappoint EU hawks.

There will be limits on the kind of debt that Russian firms cannot buy, loopholes for France to deliver a warship to Russia, and language on the “reversibility” of sanctions if Putin makes nice.

But even if the physical pain is small, the pain of the “uncertainty” of future Western action is just as real and increasing by the day.

Last week EU sources - for the first time in the crisis - leaked a paper on sanctions options.

It includes, as a last resort, “capital market restrictions … prohibition of new investment in Russia … an import ban on gas … [and] an import ban on oil”.

Later the same week, they leaked a second paper on the options currently under consideration.

They include a ban on Russian state-owned banks’ buying of long-term bonds from EU banks. But the paper notes the ban might be extended to EU sovereign bonds and to other Russian firms.

It adds that the idea is to “foster a climate of market uncertainty that is likely to affect the business environment in Russia and accelerate capital outflows”.

Risk is back

Senior EU and US diplomats are meeting every week to co-ordinate the message on Russia: that political risk is back.

They are telling journalists that allies - such as Japan, Norway, Singapore, or South Korea - might take additional, unspecified steps.

The US earlier this month also imposed mini-restrictions on capital access for four Russian firms, while threatening more to come.

Its top diplomat on Ukraine, Victoria Nuland, told press its target audience was not the Kremlin.

“The reaction of the markets is perhaps more important than the reaction by Moscow … It will take time for this to have an impact on his [Putin’s] geostrategic calculations. I don’t think anyone expected a change in policy overnight”, she said.

Unlike the Shin Bet's “stick,” Nuland described the creation of market uncertainty as “a scalpel … a new tool of European and US foreign policy”.

Putin himself, a former spy chief, tends not to blink. According to the British daily, The Times, his trainers in what was then called the KGB said he has “a lowered sense of danger”.

Ordinary people who live in former Soviet states also have a high pain threshold.

Back in 2006, when the EU began to impose sanctions on Belarus, a 60-year old taxi driver in Minsk told EUobserver: “Look. What do I care? So long as there is no war, and I can get potatoes, hot water in winter, and a bottle of vodka - I don’t need much more”.

But the psychology of international markets and of the new Russian elite is different.

Risk premiums on investments in Russia are going up, the value of the ruble is going down, Russian GDP growth is cooling, and capital outflow is rising.

A senior source in one Western multinational firm, which is in talks with a potential Russian partner, told this website: “I’m not sure what these sanctions really mean. But it makes me feel uncomfortable”.

A contact at one large German bank added: “A general feeling of uncertainty is enough to hinder investment”.

For its part, the Russian central bank on Friday raised interest rates to attract foreign speculators, who will get a bigger return on ruble-denominated financial instruments.

But a source at one big Swiss bank noted the move will have the “opposite effect” on the Russian domestic economy, where firms will have to pay more for their loans.

The bank contacts did not want to speak on the record because of the “sensitivity” of the subject.

It is normal for some sources to be shy. But the heightened level of sensitivity is linked to the heightened level of uncertainty on doing business with Russia.

Potatoes enough?

Meanwhile, in terms of soundbites, not everybody is happy with potatoes and hot water.

One EUobserver contact recently overheard a Russian family checking out of a top hotel in London. The clerk declined their credit cards because she had heard that Russia-linked Visa and Mastercard transactions “might be under some kind of sanctions”.

“Look what Putin is doing to us!” the Russian hotel guest said.

A Western diplomatic source in Moscow added that even ex-KGB hardmen are not immune to concern.

“It’s clearly beginning to hurt. The EU and the US have shown they are willing to go after big fish ... The talk of the upcoming EU package [of sanctions] has made an impact on the boss [Putin] and on his immediate entourage”, the contact said.

EU to hit Russia with economic sanctions next week

The EU is set to impose economic sanctions on Russia next week. Meanwhile, southern member states want the European Commission to consider any blowback effect when it assesses national deficits.

Column

These are the crunch issues for the 2019-2024 EU commission

These developments will largely determine who will be running the world in the coming decades and perhaps generations. If the Europeans can't find an answer over the five years, they will be toast. And we haven't even mentioned climate change.

Opinion

Time to pay attention to Belarus

Belarus may be hosting the European Games, but Vladimir Putin is not playing games when it comes to Belarus' independence. The West needs to get serious as well.

Stakeholders' Highlights

  1. Nordic Council of MinistersBrussels welcomes Nordic culture
  2. UNESDAUNESDA appoints Nicholas Hodac as Director General
  3. UNESDASoft drinks industry co-signs Circular Plastics Alliance Declaration
  4. FEANIEngineers Europe Advisory Group: Building the engineers of the future
  5. Nordic Council of MinistersNew programme studies infectious diseases and antibiotic resistance
  6. UNESDAUNESDA reduces added sugars 11.9% between 2015-2017
  7. International Partnership for Human RightsEU-Uzbekistan Human Rights Dialogue: EU to raise key fundamental rights issues
  8. Nordic Council of MinistersNo evidence that social media are harmful to young people
  9. Nordic Council of MinistersCanada to host the joint Nordic cultural initiative 2021
  10. Vote for the EU Sutainable Energy AwardsCast your vote for your favourite EUSEW Award finalist. You choose the winner of 2019 Citizen’s Award.
  11. Nordic Council of MinistersEducation gets refugees into work
  12. Counter BalanceSign the petition to help reform the EU’s Bank

Stakeholders' Highlights

  1. UNICEFChild rights organisations encourage candidates for EU elections to become Child Rights Champions
  2. UNESDAUNESDA Outlines 2019-2024 Aspirations: Sustainability, Responsibility, Competitiveness
  3. Counter BalanceRecord citizens’ input to EU bank’s consultation calls on EIB to abandon fossil fuels
  4. International Partnership for Human RightsAnnual EU-Turkmenistan Human Rights Dialogue takes place in Ashgabat
  5. Nordic Council of MinistersNew campaign: spot, capture and share Traces of North
  6. Nordic Council of MinistersLeading Nordic candidates go head-to-head in EU election debate
  7. Nordic Council of MinistersNew Secretary General: Nordic co-operation must benefit everybody
  8. Platform for Peace and JusticeMEP Kati Piri: “Our red line on Turkey has been crossed”
  9. UNICEF2018 deadliest year yet for children in Syria as war enters 9th year
  10. Nordic Council of MinistersNordic commitment to driving global gender equality
  11. International Partnership for Human RightsMeet your defender: Rasul Jafarov leading human rights defender from Azerbaijan
  12. UNICEFUNICEF Hosts MEPs in Jordan Ahead of Brussels Conference on the Future of Syria

Join EUobserver

Support quality EU news

Join us