EUROPE NEEDS TO PLAY THE LONG GAME ON SANCTIONS / THE FINANCIAL TIMES COMMENT & ANALYSIS

March 23, 2014 5:41 pm

Europe needs to play the long game on sanctions

By Wolfgang Münchau

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The region needs to address its dependence on Russian energy and cash, writes Wolfgang Münchau

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I have not been the biggest supporter of the European Council in the past few years, particularly over its calamitous response to the eurozone debt crisis. But EU leaders are right in their response to President Vladimir Putin’s aggression in Crimea.

We are not in an ideal position. Some EU member states should never have let themselves become so dependent on Russian gas. The union’s eastern partnership programmes have lacked strategic coherence, and in the case of Ukraine may have contributed to the crisis. The EU is paying a price.

But starting from where we are today, the resolution at last week’s summit of heads of government is firm, targeted and principled. It extended the list of individuals targeted but, more important, it gave a credible commitment that the EU will go further when needed. EU leaders are also right to resist full-blown economic sanctions – for now.

There are four reasons for this. First, they are more likely to backfire than to succeed. The worst thing the EU could do now would be to instigate a reaction it could not sustain. The Europeans are genuinely united in their outrage but overreaction today might put their solidarity at risk tomorrow.

It is true that sanctions would damage Russia more on aggregate than the EU – but this matters little if Russia turns out to be the more resilient party. Mr Putin would no doubt try to play off European nations against one another, knowing full well that on such issues the European Council decides on the basis of unanimity. Would Germans and Italians agree to energy rationing if, unlike this one, next winter turns out to be severe? Would the UK government happily keep diverting Russian money from the City of London? Do the French want to exclude themselves from Russian defence contracts for ever?

The second reason is that all-out sanctions today might backfire in a much more serious way: they might accelerate regional economic instability, from Ukraine southwards to Georgia, Armenia and Azerbaijan, and up to the Baltic states. Any policies to de-escalate the crisis would have to begin with solving the actual problem: the political and economic destabilisation of Ukraine. If that country’s economy were to implode, the probability of Russian interference in eastern Ukraine rises disproportionately.

Thirdly, do not underestimate the impact of the sanctions already taken. The US administration effectively cut off Bank Rossiya from the global financial markets. With the dollar and the euro as the two largest transaction currencies, the west can produce financial instability in Russia at the flick of a switch.

The fourth reason against all-out sanctions now is that the EU requires a toolkit of policy responses that it can deploy flexibly depending on developments. The annexation of Crimea and Mr Putin’s strident speech in the Duma may evoke images of the Anschluss of Austria in 1938 and subsequent incorporation of the Sudetenland into the German Reich. But the general caution against Nazi comparisons applies: the annexation of Crimea is a breach of international law that should not be condoned. But it is not the inevitable start of world war three.

In the best case, the situation could calm down. Even then, the EU would maintain its sanctions. Russia’s diplomatic isolation from global economic governance will continue.

There will be no more bilateral summits between Russia and EU members. The Group of Eight leading nations is now the G7; whether or not the change is official is irrelevant. Russia’s membership of the International Energy Agency and the OECD will remain on hold. None of this may matter to Mr Putin now but it might matter to Russians in the long run.

If the situation deteriorates the EU could move towards broader economic sanctions. This would be a test of its resolve. It would include a freeze of Russian assets in the EU; cutting the Russian banks off from the dollar and euro markets. Since EU members are exposed to Russia in different ways, it would be best to do all of it, but gradually.

Any crisis response needs to recognise that we are in for the long haul. Time is on the side of the EU. The best policy is to exhaust Mr Putin politically and economically through policies of targeted and variable sanctions that persist until there is a broad-based political agreement that secures the interest of all parties involved. Three years of moderate but sustained sanctions will be more devastating than three months of hyperventilation.

But there is something else the EU needs to do. It need to fix its own problems: its dependence on Russian energy and cash, and its policy towards its eastern neighbours at a time when momentum for EU enlargement is fading.

The trick is not to repeat the mistakes EU leaders made in the eurozone crisis: to recognise briefly the urgency of action, and then to forget all about it the second the crisis disappears from the front pages of the newspapers.


Copyright The Financial Times Limited 2014.