People are empowered by their lack of power. Malcolm Gladwell

Under pressure

‘Rogue’ states targeted by sanctions tended to be poor, underdeveloped basket cases, with close to insignificant trade links with the EU. With Russia, it’s different: The EU has to consider the economic costs.

A huge poster of a sleek airliner touching down on the runway greets visitors in the arrivals foyer, with the message Dobro Pozhalovat, welcome in Russian, printed in Cyrillic in large capital letters. But this isn’t an airport in Russia, nor in a city of the Commonwealth of Independent States (CIS, the heir to the former USSR), and neither in a neighbouring state with a Russian-speaking minority. It is in the airport of Prague, capital of the Czech Republic, an EU member state, and a major transport hub in the middle of Europe with rail and road links to German, Polish and Austrian cities. The poster, and all the other signs in Cyrillic which dot the terminal, send a clear signal: Russian visitors, and the business they bring, are welcome.

Russian investment has been flowing into the Czech Republic, in the form of property investments, finance and digital services, as they have in many other parts of the EU. Despite the fanfare connected with the recent opening of a gas pipeline supplying China, the EU is Russia’s economic partner of choice, according to Eurostat, with business with the single market accounting for over 40% of total trade. Economic interdependence has been growing between the two, reaching an unprecedented peak in 2012. In Germany, for example, exports to Russia made 3.4% of total exports in 2013.

Russia’s leading lenders

And it’s not only oil and Gas which Russia exports to the EU and the rest of the world. The olive-green signs of one of Russia’s leading lenders, Sberbank, are a common sight across Prague as well as other European capitals. Sberbank and its rival bank VEB also have a presence in Austria, Cyprus, Slovakia, Hungary, Germany and France. Tourism is on the up too: on the streets of central Milan it is extraordinarily common to see menus and information displays in Russian as well as English and Italian. Milan has become a fashionable destination for Russian tourists, and the local tourist industry is desperately trying to exploit this rare area of growth, a boon for the cash-strapped Italian economy in these years of austerity and anaemic economic performance.

Back in the motherland, European companies, from German manufacturers to Italian fashion brands to British retailers, have been quick to establishing themselves in the Russian market, exploiting its rapidly growing middle-class with its hunger for Western consumer goods. The local beer market is largely in the hands of local subsidiaries of the Danish brewery group Carlsberg, which generates almost a third of its global profits from Russia. And, of course, there is the cooperation in the energy sector too. BP has a large share in the Russian Oil giant. Rosneft, which in turn recycles profits back to Britain,

These are all reasons why the introduction of tough economic sanctions in summer by the EU and the US as a response to the Russian intervention in the Ukrainian crisis represent a novelty for European and international diplomacy. Previously, ‘rogue’ states who were targeted by sanctions tended to be poor, underdeveloped basket cases, with close to insignificant trade links with the EU, which mostly went one way. This time, it’s different: the sanctioned country is not an isolated economic backwater, but a leading emerging market, a global economic player, a member of the G-20 with important industries (and of course, a former superpower). This is frontier territory, an unprecedented situation for the international sanction regime which is still in its infancy, and can generate unexpected consequences for the EU and the west.

Hit hard

First of all, Russia has the capacity to retaliate: it showed it earlier this year, when it unleashed its regulatory claws on the two leading card payment operators, Visa and Mastercard, guilty of cutting services without warning to Russian customers following the first threats of sanctions by the US. The two multinationals had no choice but to comply with the tough new regulations if they wanted to continue servicing the Russian market, agreeing to set up processing centres on the soil of the Russian federation and to pay service charges and hefty fines if things went wrong again.

Then, there are the economic costs of lost business for European companies in Russia: the Carlsberg group, for example, has been hit hard due to its exposure to the Russian market, and has had to issue a profits warning. The EU has come under pressure from sectors of the business community to relent on some of the sanctions. The Council, at the time of issuing the sanctions, has made exceptions for European branches of Sberbank which can continue to trade under normal conditions on the territory of the member states they are already established in. The minister responsible for EU affairs, Andrew Lidington, admitted the costs to UK and European business of the sanctions imposed on Russia. Speaking to the BBC, he said, “There is undoubtedly a cost to us and I don’t think anybody from the prime minister down has pretended otherwise, just as there is for German companies, French companies, Italian companies, [and] American companies, whose governments have also introduced sanctions.”

New, tougher sanctions

The current crisis cannot turn into a rerun of the Cold War, as has been suggested in some circles, because the economies involved are much more interlinked than before the fall of the Berlin wall.And yet, more sanctions are on the horizons. The current batch has proved incapable of moving the Russian Administration from pursuing its current goals in the Ukraine. Will the introduction of new, tougher sanctions, despite the adverse effects on Western economies as well as on Russia, be able to bring about a new course in foreign policy? With warnings from the Russian ministry of finance that the economy is projected to shrink by 0.8 % next year and the Rouble tumbling ever lower in foreign exchange markets, the economic arguments are there to suggest a change in Russia’s behaviour to be likely. Evidence suggests, however, that it’s not rational economic arguments that win the day in the Kremlin council rooms but visions of imperial grandeur.


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