Europe, Russia, and the consequences of the economic sanctions

Monday 22 January 2018

In 2014, amidst the Ukrainian revolution, Russia annexed the Crimean Peninsula, a former territory of the Russian Empire. Since then, the European Union, among others, imposed economic sanctions against Russia, to which they responded with a EU food import ban. As of today, both parties have extended these sanctions throughout 2018.

When Russia annexed Crimea, the EU, United-States, as well as other of their allies, saw the move as a violation of Crimea’s sovereignty. As a result, they all implemented economic sanctions on Russia in July 2014 as a means to deter it from occupying the peninsula, and required that they leave it immediately under the Minsk Protocol. Expectedly, Russia remained in the region and even implemented their own economic sanctions on the EU, mainly through the ban of a range of agricultural products from Europe[1], barely a month after the first sanctions from the West. Since then, the EU has subsequently extended these sanctions every year until a few weeks ago when they extended them even further until July 2018[2], primarily because the Minsk II agreements were still not fully respected. On the other side, Russian President Vladimir Putin signed a Decree in July 2017, extending the Food Import Ban through December 2018[3], cleaving EU-Russian relations even more.

But what consequences have these sanctions had on Russia ?

First, it led to the collapse of the ruble (alongside the fall in oil prices), and sparked the beginning of a financial crisis, with the start of a recession (-2.2% GDP growth in 2015 compared to 2014[4]), a high inflation rate, and a budget deficit of $33 billion (3% GDP) in 2016[5].  Furthermore, in order to balance these sanctions and its consequences, Moscow has been forced to use its federal reserves (or ‘rainy day’ fund) that were estimated to be depleted at the end of 2017[6], and which was confirmed on the 11th of January by the Russian Finance Ministry[7]. With all these severe economic consequences, why hasn’t Russia still not fully complied with the Minsk Agreements ? One of the reasons is the impact the Russian Food Import Ban has had on EU trade, along with the backlash of the economic sanctions.

The European sanctions on Russia also cost about $100 billion to Europe[8], mainly because of losses in export revenues after the Food Import Ban from Russia, but also because of the recession Russia faced, leading to lower exchange rates[9]. Therefore, by attempting to punish Russia for its actions in Ukraine, the sanctions backfired on the EU and it now seems that the situation has come to a stalemate, with each party having leverage over the other.

On the 5th of September 2017, Putin stated that Russia will ask the United Nations to send its peacekeepers to Donbass in Eastern Ukraine to secure the new ceasefire[10], and when they deployed their own Russian truce monitors, they accused Ukraine of preventing them from carrying out their duties[11]. According to Ukrainian officials, the new sanctions forced Russia to modify its approach to the Ukrainian conflict and possibly to find another solution to it, but every step forward seems to be followed by two steps backwards. Finally, representatives of EU countries and its allies involved stated that they would lift the sanctions against Russia (that need unanimity to be passed) but only if Russia fulfils the Minsk II agreements[12].

However, there hasn’t been any significant progress to resolve the Ukrainian situation and both the EU and Russia appear to be in a rather stable situation, which enables them to afford the cost of these sanctions, which therefore leads to a deadlock. On the Russian side, Putin has promised his citizens that the ruble would rise again by the end of 2017[13], and while the ruble still struggles, Russia has managed to clear out of the recession last year[14]. This recovery turned out to be short[15], but Putin remains positive and stated last week that the economy was ‘on the upswing’[16]. The EU also managed to find balance, with 21 out of 28 EU countries having increased their exports to other markets worldwide which compensated for the decrease in exports to Russia[17].

So what happens now ? It appears that both parties are now in a perpetual standoff, where each one has the means to maintain economic pressure the other. They have extended their mutual sanctions through 2018, and the Ukrainian conflict doesn’t seem to be closer to a diplomatic solution than last year. Additionally, each party refuses to back from its initial stance: Russia isn’t considering leaving Crimea, and the EU wants Russia to restore Ukraine’s former borders by leaving the country. With the Russian Presidential elections taking place in less than two months, we could potentially see some unexpected developments that could bring an end to this economic battle.



















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