Russia: EU imposes new sanctions on Russia but delays implementation
September 9, 2014
The European Union (EU) announced a new wave of sanctions on 8 September, but the measures will not enter into force for several days in order to assess the viability of a cease-fire agreement and the peace plan. The new economic penalties, which will mainly impact the Russian banking, oil and defense sectors, come in response to the alleged Russian incursion into eastern Ukraine. The Ukrainian government and Western nations claimed to have evidence that regular Russian troops were fighting in Ukraine, as a long line of armored vehicles crossed the Russian-Ukrainian border and took over the port of Novoazovsk on the Azov Sea at the end of August. Ukrainian authorities described the move as a major escalation in the conflict involving Russian troops and portrayed the attack as an invasion.
The new sanctions are expected to target Russian banks and ban state-owned Russian oil and defense firms from raising funds in European capital markets. The EU did state, however, that it could suspend the sanctions if Russia were to both withdraw its troops from Ukraine and observe a ceasefire. The sanctions are expected to hit oil giant Rosneft, the oil transportation firm Transneft and GazpromNeft—Gazprom’s oil subsidiary—although the all-important gas firm itself, which is a major supplier of European energy, will not be touched. Russia’s largest state-owned banks, which have been subject to a ban on access to capital markets already, would face new restrictions that are expected to make borrowing more difficult. An additional change in the financial markets is the reduction in the bond maturities that are covered in the sanctions: Russian banks still can raise debt on European markets, but maturities were cut from a maximum of 90 days to 30 days.
Meanwhile, on the eve of the NATO summit that was held in Wales on 4 September, the French government decided to suspend supplying two Mistral warships to Russia—the combined contracts are worth EUR 1.2 billion. The French government’s decision was mainly the result of the United States, United Kingdom, Germany and other NATO allies urging France to abandon the delivery. French authorities pointed out that a decision to annul the contract has not yet been taken. The first ship must be delivered by the end of October 2014, and the second is due to be delivered in 2015. If the Mistral contract is canceled, penalty clauses will force France to pay around EUR 2.0 billion. On top of that, any failure to deliver the warships would represent a significant escalation of the Western action against Russia, which could trigger Russia to implement counter measures impacting France’s economic interests in the country.
The new sanctions are expected to exert significant pressure on the Russian economy and hence continue eroding investors’ confidence, both foreign and domestic. However, it is unlikely that the new measures will prompt Russia to end its support for the pro-Russian separatists. President Putin’s popularity has surged since the beginning of the year to reach 85%, which supports the view that the Russian government will continue to back the rebels in order to prevent their defeat and ultimately to establish a political force that would institutionalize Moscow’s influence over Eastern Ukraine. Meanwhile, in retaliation against the new sanctions, Russia warned that it will block international flights through its airspace if the EU goes ahead with the new measures.
Author: Ricardo Aceves, Senior Economist