MacroScope

EU on Russia sanctions: slowly, slowly

By Mike Peacock
July 22, 2014

Ukraine's President Poroshenko and Dutch ambassador to Ukraine Klompenhouwer commemorate victims of Malaysia Airlines Flight MH17 outside the Dutch embassy in Kiev

EU foreign ministers meet to decide how precisely to deploy sanctions agreed 10 days ago to hit Russian companies that help destabilise Ukraine and to block new loans to Russia through two multilateral lenders.

The EU foreign ministers are tasked with preparing a first list of people and entities from Russia that would be targeted. The number of individuals and companies to be penalized is up for grabs so there is scope to adopt a tougher posture.

The public statements of EU leaders have made it sound like a more dramatic move is possible. Could that be the “sectoral” sanctions that Washington has pushed for which could deliver a really serious blow to the already flatlining Russian economy? Well no, not yet. That would require another summit of leaders. The next one is set for the end of August although an emergency meeting is not out of the question and today’s meeting could give a nod in that direction.

Russia provides up to a third of the EU’s energy needs. Sweeping sanctions will inflict pain on the imposers too – on London’s dominant financial centre, on German commerce, on Italian energy security. Are they up for it? And will France give up on its 2.1 billion euros contract to sell helicopter carriers to Moscow?

French President Francois Hollande may have given a first sign of movement last night, saying a decision on whether to deliver a second Mistral carrier to Russia will depend on Moscow’s attitude over the Ukraine crisis. For the second delivery to be cancelled, EU sanctions would have to be decided at the level of heads of state and government, a French government official said. London is talking up the prospect of a defence export ban while saying it would be prepared for its financial sector to take a hit.

Dutch Prime Minister Mark Rutte is a pivotal figure given the 193 of his compatriots who perished on the downed Malaysian airliner. If he demanded action, it would be hard for his peers to demur. Yesterday, he said all political, economic and financial options were on the table. Rutte talked to Putin in the early hours of this morning.

The problem is that the pain won’t be spread evenly if Russia decides to use energy as a weapon or, less likely, the EU puts sanctions on that sector. While some member states, such as Britain, do not rely on Russian gas, others are 100 percent dependent on Russia.

Putin has belatedly urged the separatists to allow international experts access to the crash site but on the other key demand made of him – to close off Russia’s porous border with Ukraine – there isn’t much sign of movement. Washington and Kiev have put out more and more intelligence pointing to the plane being brought down by a missile launcher brought in from Russia. Moscow denies any involvement and has tried to throw the spotlight back onto Kiev.

The U.N. Security Council unanimously passed a resolution demanding that armed groups allow “safe, secure, full and unrestricted access” to the crash site.

On the ground there have been first signs of cooperation. A train carrying the remains of some of the nearly 300 victims was heading for Ukrainian government territory and a separatist leader handed over the plane’s black boxes to Malaysian experts. That was enough to allow Russian stocks to break a six-session tumble and gain about 1 percent early on Tuesday. However Australia’s prime minister said the crash site had been tampered with on an industrial scale as part of a cover-up.

Gaza will also figure high on the EU foreign ministers’ agenda. Israel kept up its assaults in the Gaza Strip on Tuesday, killing three Palestinians in as many air strikes. U.S. Secretary of State John Kerry arrived in Cairo with a mission to seek a ceasefire in the 14-day-old conflict as soon as possible. The latest killings raised the Palestinian death toll to 539, including nearly 100 children and many other civilians, Gaza health officials said. 29 Israelis have been slain.

Hungary has cut interest rates every month for almost two years and its deputy governor said last week that it had room for one or two more reductions, taking its base rate to a record low 2.3 percent. There seems little reason to think the first of those moves won’t come at today’s meeting.

In contrast, Nigeria’s central bank will leave rates unchanged for the 17th time in a row as it tries to balance controlling inflation and supporting the naira currency with fostering growth, according to a Reuters poll of economists. Tuesday’s monetary policy committee meeting will be the first chaired by new central bank Governor Godwin Emefiele and will be closely watched by foreign investors.

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