DO WE NEED IT?

Due to the rising tension between Moscow and the West the increasingly popular rhetoric on collective sanctions against Russia develops in the new course. Meanwhile, we can frequently hear statements that the introduction of total sanctions can severely damage not only the Russian economy, but also the European one.

There have been an increasing number of messages based from European politicians against the escalation of the military scenario, not the least due to economic rationale.

Berlin: ‘We do not need such sanctions’

Germany is a principal actor involved in the policy of containment of tougher sanctions against Russia. This is quite natural, as Germany accounts for a quarter of the EU-Russia trade turnover, which exceeded the pre-pandemic indicator by 25% in 2021 mainly due to higher energy prices throughout the year.

According to Robert Habeck, German Vice Chancellor and Minister of Economic Affairs and Climate Protection, Russsia provides about 55% of Germany’s natural gas imports. Any worsening of relations with Moscow, any tightening of Western sanctions will directly affect the key economic indicators of Europe's largest economy, which in turn will have a negative impact on the economy of the Eurozone as a whole. And the talks on Nord Stream 2 are only a tip of the iceberg of accumulated problems, for German companies' interaction with the Russian gas monopoly is not limited to this project only.

Back in 1990, German Wintershall, together with Gazprom, began the construction of pipelines running through the whole territory of Germany. A joint venture of these companies, Gascade, is an operator of German pipelines STEGAL, MIDAL, WEDAL and JAGAL. Gascade is also behind the construction of European interconnector EUGAL, which will carry gas from Nord Stream 2  across Germany to Poland and South-Eastern Europe.

Germany produces very little of its own oil and natural gas. Hence it mainly relies on imports of hydrocarbons to cover 95% of its demand. Despite the lack of natural resources, the country is the third largest oil processor in Europe after Russia and Italy.

German refineries have historically relied on crude oil from Russia/CIS (35%), the North Sea (32%), the Middle East (18%) and North and West Africa (15%). However, the recent production decline in the North Sea urges Germany to buy crude oil from more distant locations, which brings along logistical problems and additional costs.

And this is where Russian companies, mainly Rosneft, come to the rescue of German refiners. Rosneft now owns more than 12% of Germany's refineries, making it the third largest in the country and one of the largest in the EU.

In turn, German companies operate in Russia, including those representing large businesses with an annual turnover in excess of €15 billion. In 2019, German investment portfolio in Russia reached its highest level in a decade—more than €3 billion.

In recent years, German small and medium-sized businesses have stepped into the Russian market. Amid dwindling opportunities at home due to the effect of lockdowns, companies that know the Russian market well do not have to fear sanctions and political problems.

In this case, any tightening of economic ties between the EU and Russia hurts the interests of German companies and indirectly the German government, which are unlikely to enjoy a new package of sanctions.

France, the Netherlands, Italy... are also crying

As the EU's fifth largest trading partner, Russia is also one of the largest suppliers of aluminium, nickel, steel and fertilizers. Leading European companies have multi-billion dollar investment projects in Russia, including IKEA, Volkswagen, Carlsberg A/S and so on.

French companies are particularly worth mentioning. That is why the French President Emmanuel Macron, who met with his Russian counterpart on February 7, had as perplexed feelings as his German colleague about maintaining the level of bilateral trade and economic relations with Russia.

In fact, France is one of the five key European investors in the Russian economy (4th in the EU and 8th among all countries). The accumulated volume of French investments in Russia in 1Q2021 reached $21.7 billion (Russian investments in France were $3.1 billion). The largest French investors include TotalEnergy, Auchan, Renault, Danone, Schneider Electric, etc.

The management of these companies are still interested in doing business in Russia. Obvious profits and serious prospects in the Russian market have a major impact on their stress tolerance amid possible sanctions.

The same applies to businesses from the Netherlands. The country has been a tax and financial hub for large Russian companies, including Svyaznoy N.V., X5 Retail Group and Yandex, as well as state-run companies like Gazprom International since the mid-1990s. At the beginning of October 2020, the total volume of direct investment from the Netherlands to Russia, according to the Central Bank, was $37bn of which $30bn was invested in fixed assets. This is 9.4% of the total accumulated investment.

It would be thus interesting to know the reaction of Dutch businesses every time they hear about toughening restrictions against Russia.  "If we can't sell flowers to Russia, we will incur huge losses. We will pay for this for sure," Marcel Leuwis, head of the largest Dutch floriculture company Leeuwis, said.

The situation is no less painful for Italian entrepreneurs.  According to the Association of Italian Industrialists, about 450 Italian companies and 80 joint ventures were registered in the Russian Federation in 2017. The volume of trade turnover between the countries exceeds $20 billion.

That is why MPs lobbying for powerful industrial groups in European parliaments are openly against the sanctions. Particularly active are the representatives of right-wing and far-right parties, whose voters have long been interested to know what exactly the outcome of anti-Russian sanctions to their countries was and how the same sanctions helped Ukraine...

We don't need war

Also, a number of Eastern European leaders have recently begun to openly distance themselves from NATO's military plans against Russia.

For example, Croatian President Zoran Milanovic said that in case of a conflict between Russia and Ukraine, the Croatian authorities would withdraw their soldiers from NATO in Eastern Europe. He actually accused the US of using NATO to pursue its own foreign policy goals.

"I see reports that NATO, not a separate state, not the US, is strengthening its presence, sending reconnaissance ships. We have nothing to do with this and we won't, I guarantee you that. It has nothing to do with Ukraine or Russia; it has to do with the dynamics of US domestic policy led by Joe Biden and his administration, whom I supported as the only one in Europe... But I see dangerous behaviour in matters of international security," Zoran Milanovic said.

In mid-January, Slovak Deputy Prime Minister and Economy Minister Richard Sulik said that Crimea would remain part of Russia. He added that his view and attitude towards Moscow was shared by top officials of other EU countries. This statement may reveal some of the sentiments prevailing in the EU leadership, which, for obvious reasons, have been carefully concealed.

In November 2021, Bulgarian President Rumen Radev publicly spoke out about Crimea as part of Russia and called economic sanctions against Moscow ineffective...

Hungarian Prime Minister Viktor Orban, who visited Moscow in early February, said that the EU sanctions policy had hurt his country more than Russia. At the same time, he was sceptical about the likelihood of a war between Russia and Ukraine.

Certainly, reaction about Crimea’s belonging to Russia is extremely negative in Ukraine, which therefore opposes the easing of sanctions against Moscow. But, interestingly, Brussels has not reacted to the situation in any way. Rather it prefers to turn a blind eye to the ongoing. In the EU, the controversy over Ukraine is not seen as an important reason for internal discussions and for complicating dialogue with member states.

This certainly does not mean that an alternative view, even expressed by prominent politicians, will be a deterrent factor to a final decision. At the same time, we assume that the EU leaders will seize any convenient opportunity to seek diplomatic means to resolve the situation.

The notorious theme of split NATO-EU relations over the Ukrainian crisis is gaining new momentum, moving from political or analytical polemics to actual politics.

Meanwhile, the hype around a likely Russian attack on Ukraine has an extremely negative impact on the latter's economy. On January 28, Ukrainian President Vladimir Zelensky openly complained about the economic losses suffered by the country due to the West's information campaign over a possible Russian invasion. If the hype continues, both foreign and local investors will start to leave the country.

Therefore, the American statements about the damage that harsh economic sanctions, including disconnection from the SWIFT payment system, would inflict on Russia sound increasingly unconvincing.

Either way, it seems that the issue of a possible war between Russia and Ukraine is getting increasingly complex for European politics and economics. Pacifism of politicians is justified by the growing economic costs of confrontation with Russia.

The saddest thing is that it will take quite some time until everybody knows how to proceed.