Sanctions on Russia Pose Risks to World Economy

Germany’s economy, world oil, Ukraine’s gas, multinationals’ assets are on the line
March 6, 2014 4:31 am Last Updated: March 9, 2014 11:45 am

As European Union heads of state meet Thursday to consider economic sanctions against Russia, they face the prospect of rising oil costs, declining exports, and countersanctions.

The situation is leaving the West with fewer options to counter Russia’s military presence in Ukraine.

Oil and Gas

Neither Russia nor the West has an interest in disrupting the flow of oil. Russia would lose revenue and its reputation, while the West, especially Europe, would have to cope with higher oil prices.

“Europe cannot really afford to relapse into a third recession in six years,” Bank of America wrote in a note to clients. “As nothing meaningful in terms of sanctions came on the back of Russia’s conflict in South Ossetia and Abkhazia in 2008, it is also unlikely that anything would happen now.”

Western Europe also depends on Russia for most of its natural gas imports. The CEO of German industrial Siemens AG, Joe Kaeser, told reporters at a conference in Houston Wednesday:

“Maybe the American people or the government or whoever raises their eyebrows can say how could the Europeans be so moderate on the debate over sanctions. Guess what? You don’t want to sanction anyone you depend on.” He added the U.S. government is in a better position to call for sanctions.

German Economy

This is especially true for Germany. Not only does Europe’s largest economy import most of its gas and a lot of oil from Russia, it also exports cars, chemical products, and machinery to Russia, which is its third largest trading partner.

“The German and the Russian economy are so interwoven that sanctions would surely trigger countersanctions,” Rainer Lindner, an executive overseeing the incorporation of the Eastern German economy, told Der Spiegel magazine.

German multinationals such as BMW Group, Volkswagen AG, Metro AG, and Daimler AG have sold off sharply since the first talks of sanctions against Russia started a few days ago.

Linder added that more than 6,000 German companies operate in Russia, more than the total of all other EU members combined.

German Chancellor Angela Merkel plays a pivotal role in decision making within the EU. She will face stiff headwinds from her local constituency if she agrees to sanctions against Russia.

Russian Countersanctions

As Lindner feared, the Upper House of Russia’s Parliament already started debating possible countersanctions Wednesday, according to Russian news service RIA Novosti.

The debate centered on the confiscation of property of U.S. and European companies and whether it complies with the Russian Constitution.

The head of Russia’s constitutional legislation committee Andrei Klishas told RIA on Wednesday: “But we have no doubts that it clearly corresponds to European standards. The recent events in Cyprus spring to mind, where the confiscation of assets was the main demand made by the European Union in return for economic aid.”

Ukraine

The country is wholly dependent on Russia to supply it with cheap gas to power its economy. Already, it will not be able to pay about $2 billion in debt incurred for gas deliveries in February, according to Russian company Gazprom, the world’s largest natural gas producer.

“Our Ukrainian colleagues informed us that they would not be able to pay in full for February gas deliveries,” Alexei Miller, Gazprom’s CEO said. Gazprom will also stop providing a discount for deliveries to Ukraine in April, raising prices by 49 percent.

In addition, it seems Russia is also more able to supply financial aid to Ukraine. Prime Minister Dmitry Medvedev said Russia could make $2 billion–$3 billion available immediately. The $1 billion pledged by Secretary of State John Kerry is not enough to pay even for gas deliveries. The $15 billion pledged by the European Union is not available immediately because it needs approval from some individual member states and is supposed to be disbursed over several years.