Sanctions on Russia… the European Union’s Bitter Option

Following Russia’s 2014 annexation/retaking of Crimea and its intervention in the conflict in eastern Ukraine, the European Union, the United States and their allies imposed a series of sanctions on Russia. There is usually an interest in ensuring that sanctions harm those who are subject to sanctions much more than they do those who initiate sanctions, and it is overlooked that the effect of sanctions is time-limited; Because of the tendency of those affected to adapt and find ways to overcome it. While the economic impact of the EU’s foreign policy towards Russia on the EU’s GDP can be considered positive, the effect of these policies on the economies of the EU countries internally is quite another matter, which can be evaluated very negatively.

Western sanctions against Russia

Once again, since the start of the Russian military conflict with Ukraine in 2022, the United States and the European Union have imposed new sanctions on Russia, targeting three main axes, as follows:

1. Dramatic expansion of sanctions against specific Russian individuals.
2. a series of sanctions against individual Russian banks, including, for example, the greatly overstated EU ability to force their separation from SWIFT, the Belgium-based international interbank messaging system; It is then under the jurisdiction of the European Union.
3. The inability of the Russian Central Bank to use its international reserves in a number of countries in the world, the most important of which are: the United States, the European Union, the United Kingdom, Canada, Japan, Australia, and Switzerland.

Despite the media momentum accompanying the imposition of Western sanctions on Russia since the outbreak of the armed conflict in Ukraine, few experts have been interested in studying the impact that these sanctions will have on the West itself, especially the European Union, given that the complexity of the variables related to the Russian-Atlantic conflict is very difficult to predict. As a result of the sanctions, however, an accurate assessment of these sanctions would be an invaluable tool for decision makers, especially if their recent foreign policy decisions did not take into account the economic impact on the internal level of countries, and on the whole world.

Historically, while communism was collapsing, European countries agreed to sign the Maastricht Treaty, which included creating a unified framework for strengthening the European Union, and the fall of the Soviet Union, in late 1991, was a step forward towards achieving rapprochement between European countries and their common policies and what would be known as the Russian Federation. . The relationship between the two parties was defined by geostrategic developments represented in their relative influence on one another, especially in light of the expansion of the new political structure of the European Union to include what were previously known as “communist”, “oriental” or Soviet countries; So nowadays the European Union has become Russia’s neighbor, and cooperation and coordination between them is inevitable.

The enlargement of the European Union to the east provided the opportunity to re-evaluate the strategic and legal framework of the economic relationship with Russia; So European and Russian decision-makers agreed at the Petersburg Summit in 2003 to create the Common Economic Space, a step towards a more open and integrated market between Russia and the EU. The purpose of this economic space is to provide the means for freer trade by creating investment opportunities based on economic integration, removal of tariff barriers, regulatory convergence, and infrastructure development. Regulatory convergence aims to allow economic agents to cooperate, under a common set of rules, in many areas through an expanded market of more than 600 million consumers in the European Union and Russia. The Road Map on the Common Economic Space, which was agreed upon in 2005, defined the general objectives and areas of cooperation between the European Union and Russia in the short and medium term.

At the Khanty-Mansiysk summit in 2008, negotiations were launched on a new EU-Russia agreement that would provide a more effective framework for the strategic partnership, reflecting increased cooperation, and including legally binding commitments in the political, security, economic, research, educational, and Trade, investment, and energy.

In the first half of 2014, after the gradual application of EU sanctions on Moscow, a very rapid discussion arose about the economic costs, especially for European countries. Initially, the discussion focused on the negative consequences of disrupting trade. There is no dispute among economists – to a large extent – that additional barriers to trade and investment, which arose in this case due to restrictions imposed on exports of some goods, as well as financial restrictions, will reduce the volume of trade and foreign investment; Hence the production, value added, and employment of all trading partners within the union with Russia.

Therefore, today we find a quick approach towards settling the armed conflict crisis in Ukraine, away from the language of military escalation and threats of sanctions, especially from the central actors in the European Union, where the leaders of Russia, Germany and France announced an agreement to continue communication, and French President Emmanuel Macron confirmed, and German Chancellor Olaf Schulz, to Russian President Vladimir Putin, the need to resolve the conflict in Ukraine through negotiations.

Russia and Germany

The beginning of the twenty-first century has made Russia one of Germany’s main trading partners. Their cooperation provides imports and exports to both sides, foreign direct investment, financial resources, and all kinds of services, such as new technology and knowledge transfer.

Russia ranks seventh in the list of German imports, and Moscow is the eleventh market for exports of goods and services. Looking at the period from 2000 to 2012, it is easy to assess the upward trend in imports and exports between the two countries; In 2000, the value of exports from Russia to Germany amounted to (9.2) billion dollars, and in 2010 they reached (25.6) billion dollars; In 2012, it reached $34.9 billion. The same trend can be observed with regard to the value of imports, from (3.8) billion dollars in 2000, to (38.3) billion dollars in 2012.

In 2013, trade between Germany and Russia decreased by 5.4%, including Russian exports, and the main reason for the decline in trade performance is the difficult political context.

In the structure of German-Russian imports, one of the most important elements is the production of the energy industry, which amounts to (86.7%). Going forward, other major industry groups include: commodity industries, which account for first place in terms of exports (about 55%); industry of materials (raw and semi-finished), which occupies the second place in terms of exports (23.7%) and imports; and consumer goods industries, which account for (18.1%) of exports.

Cooperation between Germany and Russia has developed not only in foreign trade, but also in the field of foreign direct investment. In recent years, Germany has consolidated its role as a major foreign investor in Russia. At the end of 2012, all German investments in Russia amounted to (25) billion dollars, while they amounted to (21.3) billion dollars at the end of 2013. These investments can be divided into foreign direct investment worth (13.5) billion dollars, and other financial investments worth ( 13.5) billion dollars.

In 2012, more than 6000 German companies were registered in Russia. It has traded billions of dollars and has a staff of about (270,000) people. In Germany, it is estimated that about 350 thousand jobs depend on dealing with Russia.

In recent years, we can observe new trends regarding this bilateral partnership between Germany and Russia, especially as Moscow has become more attractive for further development of new technologies. There is an upward trend of the main indicators of trade and economic cooperation, even in the period of the Ukrainian crisis.

Russia and France

France is Russia’s fifth largest trading partner in the European Union, according to 2012 statistics. Trade with France accounts for (2.9%) of Russia’s trade, and an average (5.9%) of the total EU trade. As was the case with Germany, in 2013, foreign trade between Russia and France declined by (4%) compared to the same period in 2012, reaching 22 billion dollars, including exports (9 billion dollars), and imports (13 billion dollars). Billion dollar).

Looking at French imports from Russia, according to 2012 statistics, the main category of incoming goods is mineral products (along with fuel and energy products), which amount to (89.3%) of the total imports; Hence, the main commodities exported from Russia to France are petroleum, coal, natural gas, and oil.

Moving to French exports, machinery, equipment and vehicles dominate the product group with (54.2%) of the total exports, and food products and agricultural materials (11%). The main export commodities include: aviation equipment, medical products, cosmetics and perfumes, French food products, such as wine, cheese, and meat, as well as automobiles, equipment, and more.

France is traditionally known as one of the main European investors in the Russian market. In 2012, France was one of the 10 largest investors in the Russian market.

The reciprocal effects of Western sanctions on the European Union and Russia

During the period from 2014 to 2018, a loss of (-0.2%) of German GDP is estimated due to reduced exports to Russia, and Austria estimated a cumulative loss of GDP of (-0.5%). The most affected were the Czech Republic and Hungary (each with [-0.6%] of GDP), as well as Slovakia, which has a relatively high cooperation with the Russian market (loss of more than [-1%] of GDP). However, in absolute terms, Germany suffered the largest loss (export loss of more than 14 billion euros from 2014 to 2016), and Italy, France and Poland incurred significant absolute export losses in Russia as well.

The five European sectors most exposed to the Russian market at the time of the sanctions were textiles, pharmaceuticals, electrical machinery, machinery and transport equipment, all of these sectors accounted for merchandise exports to Russia more than (3%) of the total in 2013, and machinery, transport equipment and pharmaceuticals continue to lead An important role in Austrian and German exports to Russia.

By contrast, foodstuffs (imports of meat, dairy, fish, fruits and vegetables from the West, which have been banned under the Russian embargo since 2014) have not played a major role in EU exports (with the exception of the Baltic states, Finland, Germany, the Netherlands and Poland). Austrian exports of these products to Russia amounted to only 100 million euros in 2013, and part of these exports were transferred to other markets, or found their way to Russia via Belarus, or Serbia, for example.

The Austrian Institute for Economic Research (WIFO) has conducted three studies since 2014; To analyze the broader economic consequences for the European Union due to sanctions on Russia, for this purpose export losses were first converted into direct value added and employment effects, and then the indirect economic effects were estimated by linking different sectors and countries using the global econometric input-output model, which covers the 27 member states of the European Union, as well as the economies of the most important trading partners (primarily Russia, then also the USA, China, South Korea, etc.).

The first two studies took the marked decline in EU exports to Russia as a starting point for estimating the effects of direct and indirect value added and the impact on employment, revealing that the overall economic effects (losses) resulting from sanctions for the 27 EU countries (without Croatia) amounted to (27.8) billion The value-added losses amounted to about (33.5) billion euros, and the employment rate decreased by (500,000 – 870,000) job opportunities. For example, Austrian companies joining the European supply chains of the auto industry suffered severely from a decline in German car exports to Russia  [1]   [2] .

Another study, published in 2016, attempted to separate the effects of sanctions from those caused by other factors. In general, it compared the 2015 figures, and concluded that about a third of the losses of macroeconomic results – specifically – were due to sanctions, as the study analyzed about (2016) an indicator of the decline in the total financial, such as (17.6) billion dollars in value added, And about (400,000) jobs are at risk in all countries of the European Union, which represents (0.2%) of the total value added and employment, respectively [3] .

The Russian embargo imposed on selected Western countries also had a significant impact on the agri-food trade, as the products affected by the import restrictions were measured on the basis of the volume of trade for the year 2013, as they constituted more than (50%) of Russia’s imports of agri-food, equivalent to ( 9.6) billion US dollars. For the European Union, Russia is the second most important market for agri-food commodities, surpassed only by the United States of America, with exports amounting to US$15.5 billion in total, or (2.9%) of the union’s total agri-food exports. The value of EU exports targeted by the Russian import ban amounted to $7.3 billion in 2013, i.e. (47.3%) of the total agri-food exports to Russia that year; Therefore, the trade embargo affects about (1.4%) of the total EU exports of agricultural products, and the impact varies widely between member states.

For six countries (Cyprus, Latvia, Denmark, Greece, Ireland and Lithuania), at least (30%) of agri-food exports went to the Russian market in 2013. In comparison, for other EU countries, notably Germany , Sweden, Romania, Slovenia, Czech Republic, Slovakia and Malta, the Russian market represents less than (5%) of its total food exports. As a result of the decline in agri-food exports to Russia due to the trade embargo, the importance of the Russian market in total agri-food exports has decreased significantly in almost all EU countries. It examined the consequences of the Russian import ban on a number of agricultural products from the European Union and other countries, and provided an analysis of the direct and indirect consequences of these restrictions on agriculture and the food industries.[4] .

European sanctions on Russia led to the emergence of repercussions on the countries of the Union, represented in the following:

1. Increase market pressure (by withdrawing produce from the market, turning fruit into juice),
2. unstable prices (stability is achieved by covering the costs of storing relevant products),
3. precarious farm income (particularly applicable to dairy producers in the Baltic states),

Agri-food exports to Russia were not only negatively affected by product-specific discretionary trade restrictions; But also by unfavorable exchange rate movements. In early 2014, the exchange rate of just under 50 rubles to the euro was relatively stable. When the year ended, a significant devaluation of over 70 rubles per euro was observed, as a sudden and unexpected drop in demand causes prices to fall when supply cannot be adjusted. Vegetable producers were severely affected because these products could not be stored. The same is true for many types of fruit.

In Russia, there was a slight rise in food inflation between 2014 and 2015, but the simultaneous substitution of imports contributed to the revival of domestic agriculture, which was one of the rare successes of the local economy. On the level of services, tourism – in particular – was negatively affected. The number of Russian tourists decreased significantly after 2014, although this is not due to sanctions, and this can be attributed – in large part – to the depreciation of the ruble in (2014-2015); This made foreign trips for the Russians more expensive.

During 2016, the Russian economy began to stabilize, and GDP decreased by only 0.2%, although sanctions persisted. In addition, the investment climate has improved slightly, as the Russian government has been able to sell new bonds in international capital markets, capital outflows have slowed, and inward foreign direct investment into Russia, which had stalled between 2014 and 2015, has begun to return. According to International Monetary Fund estimates, the Russian economy has benefited from the increase in the price of oil from (43.7) dollars per barrel to (53) dollars per barrel; Therefore, it should be noted that the price of a barrel of oil at the time of writing this study was $128.46 per barrel.

2017 saw a strong recovery of Russian imports ([+22%] compared to 2016). This included the rise in imports from the European Union, as the Russian economy returned to growth, and the value of the ruble appreciated, without any fundamental change in sanctions policies during that year, and the recovery of Russian imports continued in 2018, and economic growth reached a strikingly high level, amounting to ( + 2.3%).

Turning to the study of the impact of sanctions on diverting trade to and from the EU, especially with regard to European companies doing business with Russia, a few, but growing, academic literature in the field of international trade has examined the effects of sanctions at the corporate level. These studies usually focus on three important points; she:

1. If companies sell less in markets they are sanctioned, or stopped altogether.
2. The mechanisms that must be in place to deal with the effects of sanctions.
3. Opportunities for affected companies to shift their sales to other markets.

Although there is no study – so far – on the corporate-level effects of sanctions on the target economy in the case of Russia, for example, two recent studies have been available that provide partial evidence in this regard [5] . One of these two studies provides useful reading on the most comparable case, the Iran sanctions regime. It found that large companies in Iran were better able to deal with shock, and they did so by shifting their sales from Western countries to China and India; Hence, in the Iranian case, large companies were often able to offset losses in markets affected by sanctions, such as the European Union and North America [6] .

Another study dealt with the corporate-level effects of the sanctions regime between Russia and Western countries, and apart from the global analysis of the overall “cost” of Russian sanctions, it relied on French data to answer the three points raised above [7] . Its analysis reveals multiple relevant results, namely:

1. The exports of French companies were affected in terms of both trade margins, ie the participation of companies in the Russian market, as well as the value of exports of those companies that remained in this market. The analysis reveals that for agro-food products, only about (25%) of the companies that previously served the market were still active after the imposition of sanctions, and that those who remained in the market stopped exporting approximately (89%) of what they were exporting. However, this shouldn’t come as a huge surprise; Because the primary objective of the sanctions is to ban the trade of the goods specified in the ban list. More interesting, perhaps, is that similar, albeit less severe, results are observed for goods not targeted by sanctions.
2. The greater part of the costs incurred by the French exporters were not due to the Russian embargo; Rather, it came as a result of Western sanctions, which were framed as “friendly fire.” More specifically, Russian sanctions only reduced the equivalent (9%) of exports, while the rest was the result of political and legal instability that was reinforced by the financial sanctions implemented since 2014, negatively affecting the ability to secure international transactions financially.
3. Diversion of trade, at least in the short term, has been very limited. Companies that had previously exported agri-food products banned under the Russian embargo were unable to recoup their losses. The average share of these companies in the Russian market was (20%) before the political crisis, and again on average, they lost almost (20%) of their total exports to all markets after the imposition of sanctions in 2014. For companies in the case of exporting non-prohibited goods Under the Russian embargo, the effects were less severe, with its average Russian market share (14%) declining in its total exports (6%).

Analysis of losses at the level of Western companies due to the 2014 sanctions provides empirical evidence of what these companies will live with again due to the 2022 sanctions.

The aforementioned European-Russian relations explain why in just a few days of Russian military action in Ukraine the global economic outlook darkened, and strong Western financial sanctions aimed at rocking the Russian economy were the cause of rising inflation worldwide.

The prices of oil, natural gas, and other basic commodities have soared. At the same time, global supply chains, which have not recovered from the pandemic, are disrupted. Given that Russia is a relatively minor player in the global economy, accounting for only 1.7% of total global output, military action and sanctions together represent a significant dose of uncertainty and volatility in the economic decision-making process, increasing the risks to the global economy.

The European Union has tried to avoid disrupting essential energy exports from Russia, on which it depends in particular to heat homes and factories, but this has not dampened the sudden rise in energy prices due to the war and fears of disruptions to the flow of oil and gas. Concerns about commodity shortages have also led to higher prices for some grains and minerals, which will lead to higher costs for consumers and businesses, as Russia and Ukraine are major exporters of wheat and corn, as well as base metals, such as palladium, aluminum and nickel, which are used in everything, from phones Portable to cars.

Western air embargo sanctions against Russia have led to similar actions; This means European cargo planes will have to turn around, spending more on fuel and possibly encouraging them to reduce their payloads; What caused a huge rise in the prices of ocean and air transportation, with international warnings that ocean freight rates could triple to $30,000 per container, from $10,000 per container, and air freight costs are expected to jump even higher.

As military action continued, oil prices were the highest since 2014, with Russia the third largest oil producer; So further price increases are inevitable. Similarly, this has happened in gas prices, especially in Europe, which gets nearly (40%) of its natural gas from Moscow, and heating bills are likely to experience insane increases, and European leaders fear that Moscow will reduce energy flows as a result of the Union support to Ukraine, and this Excluded; Because Moscow does not want to get out of the energy market, or to breach its contracts.

Russia is also the largest supplier of wheat in the world. Together with India and Ukraine, they account for nearly a quarter of total world exports. This is in addition to the lack of essential minerals. The price of palladium, which is used in car exhaust systems and mobile phones, has risen. Russia is the world’s largest exporter of the metal and may be cut off from global markets, along with the rise in the price of nickel, which is another major Russian export.

Many Wall Street analysts and economists admitted that they underestimated the extent of the economic impact of Russian military action in Ukraine, and the international response to sanctions. With events rapidly accumulating, assessments of the potential economic fallout ranged from moderate to catastrophic, with inflation already a concern, with the US reaching its highest levels since the 1980s. The question now becomes: How will the Federal Reserve and other central banks respond to this? If the West resorts to raising interest rates, this will lead to the collapse of markets, which means that military action, and the ensuing Western sanctions on Moscow, caused the global economy to derail from the path of recovery after the shock of markets due to the Covid-19 pandemic. This complicates matters for policymakers who are expected to contain inflation, which reached its highest levels in decades in countries such as the United States and Germany even before the war.

Do Western sanctions achieve their goal?

The most common question regarding Western sanctions is whether they are achieving their goal. The answer depends on the goal. Sanctions generally pursue at least one of three goals (most of the time – all three):

1. Warning
2. ban
3. force

The goal of the international consensus on sanctions was to show a negative attitude towards various activities of Russia. It may be noted that this objective has been fully achieved. As for the goal of preventing Russia from worsening the situation in Ukraine, or forcing Moscow to change its foreign policy, sanctions have made no progress so far.

On the contrary, Western sanctions have justified both the severity of Russia’s military behavior and the intensity of its tone in political discourse. Sanctions also led to the unification of the state and society in Russia. For example, the 2014 sanctions against Russia increased the approval rating of Russian President Vladimir Putin, to a record high (89%) by 2015. Putin has fueled societal mobilization by discursively linking the current sanctions campaign with entrenched perceptions of Russians who appear Indomitable character and nature throughout history, especially since World War II. Although economic hardship is now greatly felt, few people associate inflation, economic stagnation, and low standards of living with Russia’s foreign policy, and government corruption remains a more common explanation, as the burden of unpopularity falls on the Russian government, which reinforces the link between foreign policy and internal economic difficulties.

There are other issues that contribute to the failure of sanctions against Russia to achieve their coercive goal, such as:

1. Russia believes that the sanctions will be in effect forever; Because the prospects for their removal are ambiguous. This belief became rooted when the European Union regularly and meticulously rolled out its sanctions, even when the pre-2014 sanctions were linked to the implementation of the Minsk Accords. A powerful reminder that sanctions live much longer than the reasons for imposing them.
2. The West has linked sanctions against Russia not only to the steps that Moscow is taking, but also to the actions that the Ukrainian authorities (will not) take. For their part, the Russian authorities have stressed that linking any agreement with sanctions is unfair, as Russia is punished for refusing to implement any other party’s part of any expected agreement.
3. EU and US sanctions were not smart enough. In other words, targeting companies and individuals (allegedly) involved in waging war on Ukraine ignores that measures were taken in Russia’s post-2014 interior to protect certain strategic individuals and companies. The sanctioned banks benefited from the massive purchases of the Russian Central Bank, which also helped the sanctioned banks access foreign currency. In addition, Russia has inflated its military spending, which has boosted employment in this area.
4. Companies and individuals subject to the 2014 sanctions were awarded lucrative contracts. According to some estimates, the Russian state budget bore about 45% of the total costs of the sanctions.
5. The sanctions led to a massive import substitution program in Russia, particularly in agriculture, machinery, and information technology. This program includes a combination of research and development support, grants, state investment in new production facilities, and a favorable procurement policy for locally produced goods. The program was implemented at the corporate level. The state budget often bears the price of the assets that already exist globally. Permanent import substitution also requires access to Western technologies and global markets, both of which are currently limited. Import substitution policies have also created stakeholders within the country for whom sanctions are profitable.
6. Russia’s oil and gas production has increased in the years following the imposition of the 2014 sanctions, which could be an indication of a successful adaptation to the imposed sanctions. However, oil and gas sanctions targeted future Russian production, and in doing so caused oil companies to delay exploring new fields in the Arctic and Siberia, although it could be argued that exploration of these fields would not make much sense given today’s high oil prices.
7. Internally, the sanctions further consolidated the power of the Kremlin, and the systematic hostility of the West against Russia led to the deterioration of the status of the liberal and commercial elite, a logical consequence of the weakening of economic interdependence. European Union sanctions have also limited the availability of international funding; Hence increased competition among the Russian elite for state funding. As a result, “discipline” was strengthened among the Russian elite. Indeed, for some, blacklisting the West has become a sign of their loyalty to the current regime.
8. Externally, Russia relies on its axis in the east as part of its strategy to adapt to sanctions. Moscow views its partners there (especially China) as an alternative source of technology and financing, as well as a market that could reduce the EU’s importance to Russian oil and gas exports, and some oil and gas companies have secured financing from China to advance their projects (such as pipeline construction, and liquefied natural gas facilities).

The future of Russian-European relations

Russia’s import substitution policies and its orientation to the east gradually reduced the economic interdependence between the European Union and Russia. This process is further enhanced by the European Union’s attempts to find alternatives to Russian energy. In the long term, some European countries favor renewable energy sources; This means phasing out oil and natural gas (which currently accounts for 70% of the EU-Russia trade balance). It is not certain how trust can be restored in the mutual economic activity between the EU and Russia. Before the outbreak of the military conflict in Ukraine, talks on Russia’s participation in the EU Green Agreement were intensified (the EU and Russia co-organized many conferences and other discussions on this topic).

After the military clash in Ukraine, the general shift to renewables will become, by linking this goal to the goal of reducing the EU’s dependence on Russia for energy, but it should be noted that there are no specific plans for EU-Russia cooperation on energy transition and hydrogen (on Contrasting with the plans of the European Union and Africa, for example).

The long-term use of natural gas in the EU also depends on whether there are commercial technologies to produce hydrogen from natural gas with low greenhouse gas emissions. At the moment, these technologies are only in beta. Russian energy companies delay commercialization of these technologies, often underestimating the importance of the green deal, as well as the commercial viability of renewables. In addition, European and Russian market players differ on whether to produce hydrogen in Russia (the EU’s preferred option), or export natural gas to the EU and convert it into hydrogen as soon as it exists (an option developed by Russian energy experts). Although there are technological reasons for each of the options, the difference between EU and Russian actors is also the result of uncertainty in bilateral relations, and their desire to avoid unfavorable outcomes (for example, stranded assets, or non-completion of projects). result of sanctions). Existing sanctions, and any potential new ones, reduce partners’ willingness to invest in long-term projects.

Sanctions limit the available financial resources (as well as the willingness of banks to engage in related operations). Additionally, Russia’s opaque ownership structure makes it difficult to establish whether specific (blacklisted) individuals or entities control a particular company, and this reinforces a cautious, risk-averse attitude on the part of EU investors when they choose not to deal with Russian partners. In addition, sanctions destroy trust, which is essential to any cooperation.

In short, the rebuilding of economic relations between the EU and Russia on the basis of energy transition and mitigation of the effects of climate change is no longer certain, along with the suspension of any cooperation in the digital economy and medicine/pharmaceuticals, which are two other important areas for the current economic recovery and the economy of the future, and doubts will lead The deepening mutual relations exacerbate the problems of economic cooperation in these areas. Given the trauma that sanctions have wrought in Russia, the country’s leadership will be skeptical about re-establishing economic interdependence with the European Union.

Finally, sanctions have diminished the EU’s importance to Russia and, ultimately, the EU’s soft power. This came as a result of the close alliance between the European Union and the United States on sanctions. The US sanctions are more comprehensive in nature than those imposed by the European Union, and they cover more Russian entities, and the restrictions on the blacklist, and other restrictions, are strengthened, in different actions, for various reasons. US actions not only affect futures contracts; It also affects current decades; Hence it covers more commercial transactions. However, the European Union, which accounts for about 40% of Russia’s foreign trade, is in a shooting-in-the-foot position.

US sanctions have deprived the European Union of much of its autonomy in building its economic relations with Russia. The United States conducts strict verification of compliance of all entities (including those in the European Union) with US measures. Washington also reserves the right to impose sanctions for violating its sanctions regime. This strategy has proven to be a very effective leverage on various individuals and entities around the world (including EU companies and banks). Even if the EU decides to offer some flexibility in its sanctions, US sanctions will effectively limit the impact of EU initiatives; Because EU companies will remain bound by US sanctions. Given the state of US-Russian relations today, it is unlikely that US sanctions will be eased or rescinded in the medium term. The European Union has already become aware of this extraterritorial influence of US policies. However, EU discussions on any mechanism to bypass US sanctions do not appear to be credible.

[1] Christen, E., Fritz, O. and Streicher, G., Effects of the EU-Russia Economic Sanctions on Value Added and Employment in the European ,Union and Switzerland, Research Report for LENA, the Leading European Newspaper Alliance, WIFO, 2015. https://www.wifo.ac.at/jart/prj3/wifo/resources/person_dokument/person_dokument.jart?publikationsid=58219&mime_type=application/pdf

[2] Christen, E., Fritz, O., Huber, P. and Streicher, G., The Economic Impacts of the EU-Russia Trade Conflict, Research Report for the Austrian Federal Ministry of Science, Research and Economy, WIFO, 2014. https://www.wifo.ac.at/jart/prj3/wifo/resources/person_dokument/person_dokument.jart?publikationsid=50950&mime_type=application/pdf

[3] Christen, E., Fritz, O., Streicher, G. and Hinz, J., Effects of the EU-Russia Economic Sanctions on Value Added and Employment in Austria and the EU, Research Report for the Austrian Federal Ministry of Science, Research and Economy, WIFO, 2016. https://www.wifo.ac.at/pubma-datensaetze?detail-view=yes&publikation_id=58982

[4]  Sinabell, F., Egartner, S., Heinschink, K., Pistrich, K., Resl, T. and Tribl, C., Restriction of Agricultural Exports to the Russian Federation, Possible Effects on Austria, WIFO, Vienna, 2015.  https://www.wifo.ac.at/jart/prj3/wifo/resources/person_dokument/person_dokument.jart?publikationsid=57840&mime_type=application/pdf

[5] Hinz, J., ‘The Cost of Sanctions: Estimating Lost Trade with Gravity’, mimeo, 2017. https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/Julian_Hinz/the-cost-of-sanctions-estimating-lost-trade-with-gravity/kwp_2093.pdf

[6] Haidar, J.I., ‘Sanctions and export deflection: evidence from Iran’, Economic Policy, 2017, https://scholar.harvard.edu/files/haidar/files/haidar-sanctionsandexportdeflection-finaldraft.pdf

[7] Crozet, M. and Hinz, J., ‘Friendly fire-the trade impact of the Russia sanctions and counter-sanctions’, Kiel Working Paper, No. 2059, 2016. https://www.econstor.eu/bitstream/10419/148042/1/872772748.pdf

Center for Arab-Eurasian Studies