A few weeks ago, the EU extended its sanctions against Russia for another 6 months. However, some days before that move Russia had already extended its sanctions on the EU for one and a half years. So, this fight is turning out to be a battle of wills or, better, a War of Thrones. Currently, most commentators in the EU are highly sceptical about the sustainability of sanctions. Asked for radio comments on Juncker’s visit to the St.Petersburg summit, the question was framed as “Is this visit to design how we are going to lose against Russia?”.
Although not many politicians will admit in public, the tough stance on Russia has surprised many familiar to muddled compromising EU policy making. The timing of events has played an important role. Starting with the new concept of ‘smart sanctions’ – targeted at individuals and especially disrupting network effects in the economy – the first two waves of sanctions were considered mild. But MH17 created a different dynamics to trigger broad sanctions on strategically important sectors like energy and high tech. Weeks after the crash even these seemed mild, but when time started to erode sentiments, policy makers started to think twice about relations with Russia in the long run. German Foreign Affairs minister Steinmaier has argued for a return of Russia in G8, Renzi and Juncker have argued in favor of re-engaging Russia. The new UK foreign minister Boris Johnson has a somewhat strange position, on the one hand claiming that the EU should unambiguously choose relation with Ukraine over Russia, while on the other hand using EU sanctions on Russia as prove of EU foreign policy imperialism and aggression. If this schizophrenic position is the final one, he is in for a EU fight, although not sure on which position the most.
It is difficult to judge the effects of the crisis for Russia – for the EU they are bad with certainty. For Russians the short term effect of sanctions on EU food imports are most important, but the elderly hit hardest are used to this kind of hardship. To my casual observation in Russia, it does not erode the support for Putin’s policies. However, smart sanctions from the EU side are to work in the long run. The main effect is to deteriorate the investment climate and creating large investment risks. A case in point is the recent Russian return to the bond market arranged by VTB capital. Nobody knows whether the investors are off-shore Russian funds, whether China is involved, but for sure nobody can find a Western party involved in the buying. But most agree that is the bond sale was a failure. Also, in Russia’s complex federal system public finances are a mystery, and a careless remark from Medvedev that pensioners have to wait for better times because there simply is no more money makes hearts tick quicker in the US and in the EU.
However, recent data cement my impression of recent visits: The smart sanctions have their predicted old school economic effects which may stresses a positive outcome in the longer run. June manufacturing production expanded at the quickest pace for two years, largely because of the increase in domestic demand as exports contracted further. With rising domestic demand, aggressive smart import substitution policies for technology are starting to kick in as well. Although the Netherlands is especially hard hit by Russian sanctions on agricultural products, exporting agricultural technology is actually supported and firms take advantage of this opportunity. The same holds for the medical sector. Together with stronger Russian ties with China and also Japan – which regards ties with Russia as counterbalancing increased Chinese influence – and undoubtedly Turkey in the near future, Russia and the sanction breakers are in fact winning.
Does that mean we the EU are losing? Well, yes and no. Yes, because in the December review round and possibly earlier we will be forced backm to the negotiating table without Minsk 2 implemented and a very weak hand. No, because the sanctions have had to some extent their desired effect: Russia has abstained from further aggression in the Ukraine and other parts of Eastern Europe, which was the ultimate goal. This then sets the stage for the challenges of the coming months. First, how to react to testing aggression by Russia in Eastern Ukraine, to me highly likely given the weakened position of the EU. Second, and probably most important in the long run, how to deal with eroding support for sanction in France, Italy and Germany while this support is still strong in Poland, the Baltics, and the UK. Before Putin starts testing this, we have to anticipate with restraint how to react, otherwise it will be too late to find common ground. The worst thing to do though is to play along the Russian game of raising the stakes. There is a reason why Russian roulette is, well, called Russian.