MacroScope

The long and winding road to sanctions

By Mike Peacock
July 28, 2014

Russia's President Vladimir Putin talks to reporters during a meeting in Brasilia

If it’s true to its word, the European Union will impose sweeping new sanctions on Russia this week, targeting state-owned Russian banks and their ability to finance Moscow’s faltering economy.

EU ambassadors will continue discussions on the detail of new measures, most significant of which would be banning European investors from buying new debt or shares of banks owned 50 percent or more by the state.

An embargo on arms sales to Moscow and restrictions on the supply of energy and dual-use technologies is also on the table but it looks like restrictions to supplying technology to Russia will include oil but exclude the gas sector.

European Council President Herman Van Rompuy wrote to EU leaders asking them to authorise their ambassadors to complete an agreement by Tuesday. That would avoid the need for leaders to hold a special summit to approve the sanctions.

There remains the possibility that some of the proposed measures could be diluted or thrown out but that would amount to a pretty damning indictment of the EU’s resolve, which appears to have been stiffened by the nearly 200 citizens of one of its founding members – the Netherlands – killed in the Malaysian airliner downed over Ukraine.

Germans must put peace before economic considerations and accept tougher sanctions against Russia if necessary, Finance Minister Wolfgang Schaeuble said on Sunday.

The measures have been carefully crafted and narrowed somewhat since they were first floated. For instance, sanctions on arms and hi-tech goods are likely to apply only to future contracts, leaving France free to go ahead with the delivery of Mistral helicopter carriers being built for Russia.

On the ground, fierce weekend fighting raged near the site of the downed Malaysian airliner. Russia dismissed U.S. allegations it was about to hand over more missiles to the separatists, Washington releasing images it said showed Russian forces had fired across the border at the Ukrainian military in the last week.

Russian shares have opened 1 percent lower. Potentially rubbing salt into Russia’s wounds, a court in the Hague on a $100 billion lawsuit filed by former Yukos shareholders against Russia, claiming expropriation of their holdings.

The Kommersant daily has reported that Moscow will be told to pay up $50 billion. That has knocked nearly 2 percent off Rosneft, Russia’s top oil producer. Most of the Yukos assets were handed to Rosneft in auctions.

Fighting subsided in Gaza on Sunday after Hamas Islamist militants said they backed a 24-hour humanitarian truce and U.S. President Barack Obama called for an unconditional ceasefire but there was no sign of any comprehensive deal to end fighting with Israel.

Some 1,031 Palestinians, mainly civilians and including many children, have been killed in the 20-day conflict. Israel says 43 of its soldiers have died, along with three civilians killed by Hamas rocket and mortar fire.

The Bank of Israel is expected to hold short-term interest rates at 0.75 percent for a fifth month running today. There are signs the Israeli economy is growing faster than expected but fighting in Gaza is beginning to take a toll.

At least 36 people were killed in Libya’s eastern city of Benghazi where Libyan Special Forces and Islamist militants clashed on Saturday and Sunday. In the last two weeks, Libya has descended into its deadliest violence since the 2011 war that ousted Muammar Gaddafi, with the government unable to impose order. The United States, the United Nations and Turkey have pulled their diplomats out.

Over the weekend, Nigeria confirmed that a Liberian man who died in the densely populated commercial capital Lagos has the deadly Ebola virus, the first case on record in Africa’s most populous country.

Ebola has killed 660 people across Guinea, Liberia and Sierra Leone since it was first diagnosed in February. In Sierra Leone, the first known resident with Ebola in the capital Freetown who went on the run with her family was recovered but died in an ambulance on the way to hospital.

The IMF will publish its detailed staff report on the UK economy. Last week, as part of its world outlook, it raised its British growth forecast quite sharply to 3.2 percent for this year and 2.7 in 2015.

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