November 14, 2014
|UK PM Cameron warns Russia of sanctions ahead of G20|
Over the past few days we have seen the situation in Ukraine begin to escalate once again. Both NATO and the Organisation of Security and Co-operation in Europe (OSCE) have said that they have witnessed significant military movements in Eastern Ukraine, most likely from Russian troops. By almost all accounts the ceasefire only continues to exist on paper (although we have pointed out before why both sides might be willing to continue to pretend it is more than that).
Why has the situation suddenly escalated?
In all honesty, it’s not entirely clear how significantly the situation has escalated on the ground in Ukraine, given that there have been continuous reports of fighting since the ceasefire was struck. It could be more a case of attention shifting back to Ukraine ahead of the G20 and EU meetings. That said, Russia continues to push the boundaries with military exercises. Furthermore, the elections (both in Ukraine and the separatist regions) have increased tensions, while Russia is reportedly keen to help further establish the newly elected separatist leaders.
As might be expected, these reports have once again triggered the discussion on whether the US and EU should increase sanctions on Russia. As we reported in our press summary today, numerous leaders have come out warning of the potential increase in sanctions – surprisingly this also includes representatives of Hungary and Slovakia, though both countries remain a bit divided on sanctions.
While there is lots of talk of further sanctions we would not get ahead of ourselves. Crucially, German Chancellor Angela Merkel has already played down the chance of this in the near future as we reported in our press summary earlier in the week. EU officials have also suggested any agreement is unlikely at Monday’s meeting of EU foreign ministers, although a discussion will be had at the meeting of EU leaders in mid-December.
What could be on the table if sanctions are escalated?
We’ve discussed many times before the options for sanctions but below are a reminder of the potential options if they wanted to take the next step up from the current sanctions.
Expanding list of individuals subject to asset freezes and travel bans: This is a virtual certainty and should be agreed at Monday’s meeting. Specifically the newly elected officials for the pro-Russian separatists will be targeted. More broadly, those involved with the elections in the region could be targeted. It’s not yet clear if there will be a broader discussion about adding further people or oligarchs close to Russian President Vladimir Putin to the list (we have pointed out the potential legal concerns on these sorts of sanctions here).
There are a few other options which the EU could consider (many of which we have discussed before):
- Ban purchases of new Russian sovereign debt – this was reportedly toyed with before but considered too harsh a step. As we noted before, this would probably be manageable for Russia given its fairly low government debt level but it would add another difficulty at a time when the economy and state budget is coming under severe pressure.
- Broaden scope of technological sanctions – this would involve expanding the list of banned tech exports to Russia, currently very focused on oil exploration. It could also include expanding the ban of services which European firms can provide to Russia, which again is currently focused on oil exploration.
- Extend financial sanctions – similar to the above, this would involve broadening the existing financial sanctions from just state owned firms to Russian firms more generally, most likely still only in specific sectors such as financial and defence. This would be legally difficult since the ties to the state would become even more indirect and justification would need to be watertight.
- Broaden scope of financial sanctions – related to the above, rather than expanding the number or type of firms subject to the sanctions, the EU could broaden the scope of the sanctions. This could, for example, mean cutting off all euro funding from certain state owned firms, no matter what the maturity or the type of loan (there are probably a few incremental steps or variations between this and where we are now).
- Remove Russia from the SWIFT system – This remains very unlikely and for some very practical reasons. SWIFT is independent and private. Removing Russian financial firms from this system would mean having heavy direct sanctions on them which forces SWIFT (in acts of compliance) to shut them off from the system. This is one of the key reasons it has never really been discussed at the top level as a realistic option so far.
For his part Putin continues to demand a removal of sanctions but if they were ramped up it is likely he would be willing to retaliate with his own sanctions, some of which we looked at here.
In terms of the broader picture it’s clear that sanctions, combined with the falling oil price, are hurting the Russian economy. However, they do not yet look to have impacted Putin’s approach or course of action. As we warned before, the lack of a clear goal or strategy for the sanctions as well as in terms of what Europe actually wants in terms of a future relationship with Ukraine and Russia could well hamper the approach. The EU would do well to discuss this, not least because the continuing downward spiral of the Ukrainian economy will likely (as we warned some months ago) lead to further bailout requests.Open Europe blog team