Russia vs. the World

By Michael Jones (michael.jones@tsiglobalconsulting.com)

It’s been a very long time since this blog last wrote on Russia – last time, we discussed its relationship with the U.S., and how security disagreements led to tensions over the Sochi Olympics. Of course, things have changed drastically since then. The “Euromaidan” protests in Ukraine spiraled out into full-blown regime change, Crimea declared its independence, and Russia was dragged into (willingly or otherwise) a conflict with its western neighbor over its legitimate leadership. Of course, Russia’s actions in Ukraine have also brought in a large amount of other actors into the mix; some of which have enacted sanctions against Russia in an effort to bring the conflict to an end. Of these actors, one particularly stands out – the European Union. Due to its strong economic ties with Russia, the EU’s opposition to Russian intervention in Ukraine appears somewhat strange. What do the EU’s sanctions actually consist of? What are the opinions of the EU member states? And, perhaps most importantly, will these sanctions have any effect?

Those who have kept up with events in Ukraine already know that the primary focus of the EU”s sanctions against Russia is to target its energy industry. This will hit Russia’s economy particularly hard: currently, oil and other types of energy account for up to 39% of Russia’s overall economic output, and most of the largest importers of Russian oil are EU member states such as Germany and Poland. But what else do these sanctions do? Several areas of the sanctions focus on targeting the Russian elite specifically. In one clause of the sanctions, travel bans and asset freezes are laid out for some of Russia’s wealthiest oligarchs, while other sections prohibit trade and loans to these same entities. “Why focus on these specifically?” you may ask. The answer lies in the reach of these elites – many of these oligarchs wield both economic and political power in Russia, and most are considered to be part of Russian President Vladimir Putin’s “Inner Circle”. The EU appears to be hoping that putting pressure on these elites can indirectly lead to political pressure on President Putin. For people involved in international trade, this means that if you have goods from the EU and are bringing them to Russia, be wary about the size of your business partner: you are most likely safe if you are dealing with a small business, but large companies may be blacklisted by these sanctions.

One last item that is worthy of note about the sanctions themselves: another clause reads that any dual-use goods with military applications and have the Russian military as an end user are banned to be exported to Russia from the EU. Additionally, these sanctions also state that 9 “mixed defense companies” are also prohibited from being the end user. We urge you to research your clients carefully if you are dealing in EU dual use goods, as you can get into trouble should these items end up in the hands of the previously mentioned end users.

While the EU as a whole has responded decisively to Russian aggression with its sanctions, there are many EU member states who are on the fence, or are entirely against, these punishments. Of these, some notable countries that are against the sanctions include Italy, the first country to actively speak out against the sanctions, likely due to high level connections between Italian business and the Russian oligarchy, and France. Also worthy of note is Germany, since, despite not being as firmly against measures as as the previously mentioned two, is still leaning towards opposing sanctions. The reason for German opposition is likely due to the fact that they are the world’s largest importer of Russian oil, and that the two countries have recently been expanding their economic ties before the situation in Ukraine escalated. These countries will likely hold a lot of sway as to whether or not these sanctions will continue, so those with interests in the trade relationship between the EU and Russia should keep their eyes on them.

In regards to the last question, “will these sanctions have any effect,” the answer seems to be twofold. On one hand, in the short term, these sanctions are putting some significant pressure on the Russian regime, since as long as important trade partners like Germany are locked behind an economic wall, the Russian oil industry is going to suffer considerably. However, of course, that comes with a significant consequence for the EU – losing that Russian oil. Since any potential gains from these sanctions do not involve a replacement for this oil (even if it leads to Ukraine joining the EU, its energy contributions would be negligible), it seems unlikely that the EU will continue to implement them in the long term. If you are working with the EU and Russia, it may be best to hunker down for the near future, but don’t expect these tensions to remain indefinitely.

The fate of Ukraine still hangs in the balance, now with the economies of dozens of other nations attached to it. We at TSI will continue monitoring this crisis, in order to bring you the regulation news that your business needs. As always, for any help or advice on your international consulting needs, please give us a call at 210-757-0618, and keep checking in on the blog for more updates as they happen.

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