Sanctions against Russia reduce Europe’s GDP by 0.4% in 2015

EU Relations with Russia Should Not Be Dictated by USA (I) (Economic aspects)

Alex GORKA | 11.01.2016 | 00:00

The EU moved on Dec.15 to extend economic sanctions against Russia for six more months. The decision is not as unanimous, as it may seem at first glance.

The discussions included testy exchanges over the Russian gas pipeline project Nord Stream 2 destined to deliver Russian gas to Germany and other European countries. Italian PM Matteo Renzi criticized Germany for championing the plan. He was backed up by Donald Tusk, the head of European Council. The Nord Stream 2 project «does not help diversification, nor would it reduce our energy dependence», Mr Tusk said.

The German Chancellor defended her stance on Nord Stream 2 suggesting that Mr Renzi’s criticism was the result of sour grapes, since Russia last year canceled the South Stream pipeline project, which would have had the participation of the Italian energy sector in delivering gas to the EU. Mrs Merkel said she regarded the Nord Stream 2 pipeline as «first and foremost a business proposition.»

Germany, the EU leader, needs Russian gas badly enough to confront its closest allies. Europe still relies on Russia for about 30% of its natural gas supplies. Gas from the existing Nord Stream pipeline arrives to Germany before it goes to a European gas network that serves consumers in Germany and in numerous other countries that can include Britain, France and the Netherlands. Russia is an important economic partner for Italy, where the energy industry (for instance, Eni, the Italian energy giant) has close ties to Russian Gazprom.

It’s not energy only. Important Italian industries like farming and fashion have lost business because of retaliatory EU sanctions.

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Indeed, maintaining European unity on Russian sanctions is not easy. Some EU members like Great Britain and Poland want a tougher line against Russia, while other European governments want the sanctions to be lifted.

Greece, whose continued membership in the Eurozone has become precarious as a result of debt problems, has made multiple overtures to Russia. Russia has agreed to restructure a €2.5 billion bailout loan it gave to Cyprus in 2011. In return, the government of Cyprus said it would allow some Russian naval vessels to make stops at its ports. Russia has also signaled that it may soon pass an exception to its Western food ban for Greek and Cypriot products. Moscow and Budapest enjoy a special relationship, no matter Hungary is coerced into the sanctions regime as an EU member evidently against its will. Last February the both countries signed an energy agreement.

The disagreements over the sanctions are doomed to become heated debates in the near future as the self-inflicted damage takes its toll. For instance, the European Commission expected the European Union’s GDP to drop by 0.4 percent in 2015 due to sanctions. According to an October report from the European Parliamentary Research Service, EU exports to Russia dropped by 12.1 percent from 2013 to 2014, and imports from Russia fell 13.5 percent.

«Although the overall impact on the EU economy has been rather limited, certain sectors and countries are more significantly affected», the report said.

An October report from the Center for Strategic and International Studies – authored by French diplomat Simond de Galbert, who worked on the Iran nuclear deal – argues that the hundreds of billions in euros of trade that the EU is expected to lose due to sanctions, is«significantly higher than what Iran sanctions cost the European economy in the past decade».

«After suffering a loss of 6.5 billion euros in 2014, German exports to Russia will be expected to decline another 8.5 billion euros in 2015. Even considering the trade with Ukraine and other countries in the region, we will continue to see massive losses», said Eckhard Cordes, the Chairman of Germany’s Committee on Eastern European Economic Relations in late December 2015.

In September over 6,000 from EU member states descended on Brussels with demands to compensate for Russia’s EU food import ban.

Enacted in August last year, the ban has shut out an increasing number of fruits, vegetables, meat and dairy products from the EU, US, Norway, Canada and Australia. The protesters were met with water cannons.

Agricultural exports to Russia are estimated to be worth 5.5 billion euros, according to European farmer associations Copa and Cogeca.

Some high-profile European deals have been scuttled. France lost the €1.2 billion contract to deliver two Mistral amphibious helicopter carriers to Russia. At times, France made known the desire to end the sanctions.

Now, what about the much vaunted Trans-Atlantic solidarity?

Washington is making its European partners bear the economic brunt of a sanctions regime that has little impact on the United States.

According to Politico, the US Commerce Department reports that the US exports to Russia dropped from $11.4 billion (€10.4 billion) in 2013 to $10.8 billion (€9.9 billion) in 2014 – a 3.5 percent decline – with a 10 percent drop in two-way trade. The decrease is on track to be far larger from 2014 to 2015.

In the same article Politico cites the European Commission’s data, which says the EU trade with Russia, which was roughly 10 times the size of US-Russia commerce, dropped by 13 percent from 2013 to 2014.

European leaders were said to be confused by the fact that the US violated the sanctions regime it had forced the rest of Europe to strictly abide by. In late December, 2015, the US effectively lifted a one-year-old ban on the purchase of RD-180 rocket engines ($750 million order) from Russia in the omnibus spending bill.

The move made US Senator John McCain state angrily,«This is the height of hypocrisy! How can our government tell European countries and governments that they need to hold the line on maintaining sanctions on Russia, which is far harder for them to do, when we are gutting our own policy in this way?»

Chinese official state agency Xinhua stated that the sanctions against Russia do not have a significant impact on the US economy, and that is why the Obama regime is in no hurry to cancel them, thus preferring to escalate the confrontation on the European continent.

With the talks about the unity, it looks very much like the US is outsourcing to its allies the lion’s share of the cost.

The cost grows with no practical results in sight. Beyond energy technology, the United States and Europe simply do not have much that Russia needs, experts say. «Apart from capital, technology, and certain market access, some of which has been targeted by previous sanctions, there are not that many things Russia wants from the West», said Marik String, a sanctions lawyer at Wilmer Hale and former counsel on the Senate Foreign Relations Committee.

With the US openly pursuing its goals and breaching the sanctions regime to its heart content, is the European effort worth it? Does it make sense to suffer losses for nothing knowing in advance it will all go down the drain? Is there any method in the madness? Looks like the time is propitious for European leaders and public to think twice about what they do and why.


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