Possible EU-US Sanctions against Russia and Vulnerabilities of Both Sides

Thursday, April 17, 2014

Mehdi Sanaei
Iran's Ambassador to Moscow

During recent weeks, the possibility of imposition of sanctions against Russia by the United States and its allies in the European Union (EU) has hit the headlines in major international news media. Even a brief review of this issue will attest to its complexity. In short, possible sanctions that the European Union may be able to impose on Russia can be put into one of the following four general categories.

Trade sanctions

This kind of anti-Russia bans can be imposed in the form of complete or limited and purposive sanctions. Complete trade sanctions is an option with extremely low possibility of enforcement. A main explanation for the low possibility of these sanctions is that although total volume of Russia’s foreign trade is considerably different from that of the EU, the two sides are mutually dependent on each other. The volume of Russia’s foreign trade amounts to about 850 billion dollars while the volume of EU’s foreign trade adds up to about 3,500 billion dollars, which is indicative of the high economic capacity of the member states of the EU in comparison with Russia.

At present, Russia accounts for about 10 percent of the EU’s high trade volume and is considered as the third biggest trade partner of EU member states. The United States and China stand on the first and second ranks in this regard by accounting for 61 percent and 14 percent of the EU’s foreign trade volume, respectively. On the other hand, the European Union was Russia’s number one trade partner in 2013. Now, considering the current economic situation in the world and the economic crisis with which Europe has been grappling [since 2008] and taking into account that Russia is the third biggest trade partner for Europe, it would seem unlikely that the EU member states would actually impose a full-blown economic embargo against Russia. This is true as imposition of such sanctions will face the European Union with untoward consequences. Therefore, such sanctions cannot be put on the EU’s agenda, at least, in medium and short terms.

When it comes to limited and purposive sanctions, it should be noted that at the present time, half of the EU’s exported products, including cars and transportation machinery, go to Russia and Russia is known as the second biggest market for various kinds of vehicles in the world. Given the economic situation in Europe, imposing such blanket sanctions will cause European carmakers to sustain the highest losses because they would lose one of their biggest markets in the world.

Energy embargo

At the moment, the EU member states import about 76 percent of their needed energy, including oil and gas, from Russia. At the same time, statistics show that the EU countries are heavily dependent on foreign energy imports. This issue is attested to by the fact that total share of oil and gas in the energy basket of EU member states is well over 60 percent (or 620 billion dollars) with Russia supplying the lion’s share of the EU’s imported energy. On the other hand, a large part of the oil consignments supplied to Eastern European countries and Germany is transferred through pipelines that run across Russia. This dependence is so serious that the technical system of European refineries has been adapted to work with crude oil imported from Ural region.

If the member states of the EU really intend to ban oil sales from Russia, they should first spend a lot of money on making necessary technical changes to their refineries. An oil embargo against Russia will also send great shock waves into global oil markets because Russia has been consistently among top exporters of crude oil and has been always occupying top places on the list of global oil exporters by producing more than 10.5 million barrels of crude oil per day. The consequences of an oil embargo against Moscow will not only affect Russia, but also leave its mark on the economy and industries of Western countries as well. This is true as other oil exporting countries would not be able to fill the void which has been created as a result of banning oil sales from Russia. As a consequence, Russia would most probably look to the eastern markets and in doing so, it would be probably able to bring part of the eastern oil markets, especially in China, under its control.

On the other hand, imposing sanctions on selling the Russian gas would be much more difficult for the EU than banning Russian oil sales because dependence of the European countries on the Russian gas is more than its oil. A total of 18 member states of the [28-member] EU import their needed gas from Russia. The degree to which some of these countries are dependent on the Russian gas amounts to 80-100 percent. Under conditions when the economies of European countries are grappling with a serious economic crisis, their economic systems will not be able to withstand more pressure as a result of drastic changes in the volume or price of imported energy. In the meantime, a number of European countries have come up with a number of alternatives to be considered as substitute gas resources instead of Russia.

After failure of efforts made to promote use of shale oil in certain European countries and after it was clear that this kind of fuel was not commercially viable, Europeans decided to import shale gas from the United States in the form of liquefied natural gas (LNG) or liquefied petroleum gas (LPG). Although certain measures have been taken in this regard, none of them have borne fruit so far. In the meantime, it has now become clear that development of shale gas resources in EU member states will not reach the commercially viable level before 2015. Production of gas in Eastern Mediterranean waters (including Israel’s coastal waters) needs hefty investment. Even after that investment is made, it would take between 2 to 5 years before production can actually start. In case of Iran, such investment would not be necessary, but the political approach that the EU leaders have taken to economic issues has barred them from making the optimal use of Iran's gas reserves.

It should be noted that the mere suggestion of imposing sanctions on Russia is a great concern for Moscow as well. At present, the Russian economy is seriously dependent on revenues earned through oil and gas sales and any factor undermining those revenues will most probably face the country’s fragile economy with irreversible damage. According to official figures, Russia exports a total amount of 130 billion cubic meters of gas to Europe, which makes up about three-fourth of total gas exports of Russia. On the whole, oil and gas exports account for over 20 percent of the Russian government’s revenues. Now, considering the reduced growth of the Russian economy and severe capital flight – which has added up to over 50 billion dollars during the past three months –, if the Russian government also lost oil and gas revenues, it would be a drastic blow to the Russian economy, whose consequences would be possibly beyond repair. In addition, the pipelines carrying the Russian gas to European countries have been built through hefty spending. At present, the Russian gas is transferred through three major pipelines known as Nord Stream, South Stream and Blue Stream. The owners as well as investors of these pipelines will never allow the government to leave them in a state of inactivity.

Sanctions on investment and technology transfer

At present, the issue of modernizing the Russian industries using technology and capital from the Western countries is top on the agenda of the Russian government and serious measures have been taken in this regard. Those efforts have been relatively successful as witnessed, inter alia, by production of Sukhoi Superjet 100 passenger plane; manufacture of modern European cars by the Russian automobile manufacturer, AvtoVAZ; cooperation with European countries in deep sea oil drilling by Russia’s state-owned oil company, Rosneft; and cooperation with the US-based oil and gas giant, Exxon Mobil. Under these conditions if the European countries take serious steps against Russia and take measures to prevent the flow of capital and technology toward Russia, the Russian economy will be faced with serious problems. This is the only issue which can put a lot of pressure on the Russian economy without doing any harm to the economies of the European states. As for investment and capital flow, the European countries will not only try to prevent flow of more capital to Russia, but will take steps to attract Russian investors and encourage them to leave the country as well.

Limited sanctions against Russian banks

Imposing limited sanctions against Russian banks in accordance with the same model already enforced against Iran is one of the options, which is currently being discussed by the European countries. Of course, imposing severe sanctions against Russia’s banking sector is practically impossible, but serious dependence of Russian banks on foreign creditors calls on Moscow to take very serious practical steps in order to prevent the destructive effects of such sanctions. At any rate, the volume of trade exchanges between Russia and the United States is not considerable. Therefore, even complete cessation of trade between Moscow and Washington will not cause a serious problem for Russia. However, a possible ban on the transfer of technology and investment in Russia by the United States and taking restrictive measures against Russia through the European countries and international economic institutions will have considerable impacts on Russia.

Key Words: EU-US Sanctions, Russia, Vulnerabilities, Trade Sanctions, Energy Embargo, Iran's Gas Reserves, Investment and Technology Transfer, Russian Banks, Sanaei

Source: Khabaronline News Website
Translated By: Iran Review.Org

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