Vidya Ram

How to solve a problem like Russia

VIDYA RAM | Updated on July 23, 2014

Europe cannot take punitive steps without hurting itself, economically and financially

If ever there were an event that highlighted the enduring divisions within the European Union, it is surely last week’s tragic downing of Malaysian Airlines MH17 with 298 on board, and the tough decision on how to respond.

Until recently, Europe had mostly presented a united front when it came to dealing with the Ukraine-Russia, joining the US in imposing Tier 2 sanctions on Russia aimed at individuals and businesses identified by them as having a connection to the instability in Ukraine.

However, the decision on what to do in the face of the latest tragedy is proving more divisive.

At the heart of the problem is the extensive and very varied relationship that individual European countries have with Russia, which will not only make it harder for European nations to pick industries or sectors to target, but could also make Russian threats of retaliation against individual countries much more powerful.

Business interests

The Dutch Prime Minister Mark Rutte faces a particularly tough challenge: balancing the huge and understandable anger in his country (in a country of just under 17 million the deaths of 193 nationals in a single incident is almost unfathomable) with economic realities.

The Netherlands has one of the most extensive economic relationships with Russia within the EU: Dutch companies have made numerous and sizeable investments in Russia (Royal Dutch Shell has a 28 per cent holding in the Sakhalin-2 oil and gas project, and recently announced plans to expand the project, while electronics firm Royal Philips also has a big presence in the country).

The Netherlands’ low corporate tax regime has led to many Russian firms setting up units in the country — something that has come under scrutiny since the tragedy.

So far Rutte has been cautious, avoiding calls from the US for Europe to treat the MH17 tragedy as a “wake up” call, until more is known.

Earlier this week, Rutte stressed the need for the focus to remain on the recovery of bodies and establishing the facts (earlier this week the UN Security Council unanimously adopted a resolution demanding “safe, secure, full and unrestricted access” to the crash site and surrounding areas for a full and independent international investigation.)

Not in one voice

Since the start of the crisis, the European response to the crisis has contrasted with that of the US, which a few days ago placed sanctions on a number of Russian companies including energy companies Rosneft and Novatek, and financial institutions, Gazprom Bank and Vneshconombank.

On Tuesday, a meeting of European foreign ministers concluded with a cautious plan of action: it will draw up a list of further individuals and institutions to be targeted by asset freezes and visa bans on top of those already in place, and has called on the European Commission to put together a set of proposals for ratcheting up sanctions to the so-called Level 3, which would involve sector wide sanctions, should Russia not cooperate with the independent investigation.

However, Level 3 sanctions, which would require agreement across the 28-member region, would be hard to agree on given the varied nature of European nations’ relationship with Russia. Exemplifying this was the stand off over the past few days between France and Britain over calls to target the defence and financial sectors.

British Prime Minister David Cameron drew an angry response from France over his “this would never happen here” rebuke of France and its decision to go ahead with supplying Russia with a warship this year as part of a 1.2 billion euro contract (France has said that the delivery of the second one is subject to Russia’s next tseps). Britain has been pushing for an arms embargo on future contracts.

A senior member of the French Socialist Party, Jean Christophe Cambadelis, accused London of hypocrisy, pointing to Britain’s standing as a favourite location for Russia’s billionaire elite, and its reluctance to embrace financial sanctions that could jeopardise the City.

The British government also faced criticism from a parliamentary committee, which noted the government’s continual approval of the supply of arms exports to Russia.

Mutual beneficiaries

By contrast, financial sanctions would have limited impact on France, but the fall out for countries such as Britain and Austria would be far greater. While Britain and Sweden have led calls for a toughening up of sanctions, the rest of Europe has chosen to be cautious.

In a recent interview with the Spiegel, German Foreign Minister Frank-Walter Steinmeier emphasised the need to maintain channels for negotiation possibilities at the same time as pressure.

Germany’s caution is understandable: like much of central and eastern Europe, it is heavily dependent on Russian gas which makes up 40 per cent of its gas imports (Poland imports over 60 per cent and Lithuania over 90 per cent) while Russia is a significant destination for German imports.

The German Chambers of Industry and Commerce has estimated that the sanctions already in place have hit over a quarter of German exporters, while lobby group the Committee on Eastern European Economic Relations has warned that 25,000 jobs in the country are on the line as a result of the stand off.

However, it would be wrong to take the caution exercised by much of Europe as a sign of weakness: while a mounting body of evidence seems to point to the culpability of rebels in eastern Ukraine in the downing of the plane, a highly charged situation risks being made worse by hyperbole and confusion.

Take for example the screaming headlines accusing rebels of disrespectful behaviour on the scene versus comments made by one of the Dutch forensic team, who told the BBC that they had done a “hell of a job” maintaining the site.

In this context, waiting for the outcome of an independent inquiry, and maintaining a healthy dialogue with Russia is the most prudent policy possible.

Europe’s lumbering decision-making process has often come under criticism from those outside — who railed against its handling of the economic crisis.

However, its detractors’ worst fears have proved wrong and by and large much of the region is on the road to recovery.

Its measured response so far to the crisis in Ukraine could prove to be exactly what is needed to avoid further escalation of the conflict.



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Published on July 23, 2014
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This article is closed for comments.
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