Will Fresh US-EU Sanctions Hurt the EU More Than Russia?

The sanctions could end up causing more pain to U.S. allies in Europe than Russia itself, which will probably use this opportunity to take another step closer to autarky. 

Following Vladimir Putin’s recognition of the breakaway regions in eastern Ukraine, the US has said it will unveil a raft of new sanctions against Russia on Tuesday. This follows a Reuters report on Monday, citing “three unnamed sources familiar with the matter,” that new sanctions could include could include a measure that would prevent financial institutions in the U.S. from carrying out transactions with Russian banks.

This is apparently the ace up Washington’s sleeve. Finally, sanctions on Russia that will really bite. However, as Reuters points out in the article, the White House hasn’t publicly announced plans to force US banks to sever relationships with Russian financial institutions. But behind closed doors that is what is allegedly happening — again, according to Reuters’ three unnamed sources:

They aim to hurt the Russian economy by cutting so-called ‘correspondent’ banking relationships between targeted Russian banks and U.S. lenders that enable international payments.

The sources also said the U.S. would place certain Russian individuals and companies on the Specially Designated Nationals list.

It would effectively kick them out of the U.S. banking system, ban trade with Americans and freeze their U.S. assets.

It was unclear who the targets would be, but the sources believe top Russians lenders like VTB Bank and Sberbank could be on the list.

Experts believe it would be a meaningful blow to sanctioned bodies, as it would make it difficult to deal in U.S. dollars – the global reserve currency.

Nord Stream 2

Severing transactions between Russian banks and U.S. financial institutions could have a bigger impact on Russia’s economy than the sanctions unleashed to date, but they could also backfire. Not only could it hurt Russia’s economy by further weakening the ruble, which is currently close to a historic low against the dollar, and turbocharging inflation (already at 8.73% in January); it could also set off ripple effects across Europe, which has far closer economic ties with Russia than the U.S. The Italian lender Unicredit has already backed out of a potential acquisition in Russia over fears of sanctions.

One of the biggest concerns in Europe is that the EU’s package of sanctions against Russia will include the continued closure of Nord Stream 2, the 750-mile, $11 billion underwater gas pipeline connecting Russia with Germany. The pipeline was finished in September 2021 but is still yet to receive final certification from German regulators. If it ever becomes operational, it will significantly boost deliveries of gas directly from Russia to Germany and then on to other parts of Europe, relieving some of the pressure in energy markets.

But the pipeline has faced concerted opposition from the United States, the United Kingdom, Ukraine and other European countries, which have been calling for the project’s cancellation ever since its launch in 2015 over fears that it will significantly increase Russian influence over Europe. Of course, the United States, as the world’s largest producer of natural gas, has a direct financial interest in preventing Russia, the world’s second largest producer, from increasing its market share in Europe.

Austrian Chancellor Karl Nehammer said Monday that EU sanctions against Russia in the event of an invasion of Ukraine (which to all intents and purposes hasn’t really happened yet) will include measures targeting Nord Stream 2: “Certification (of the pipeline) would then be stopped (if Russia invaded). There is no question about that. That therefore means that Nord Stream 2 is part of the sanctions.”

Another round of sanctions against Russia will probably have a relatively muted impact on the U.S. economy. The U.S. imported a meagre $30 billion of goods from Russia in the first eleven months of 2021 while $13.2 billion of goods travelled the other way. However, the U.S. could suffer indirect effects if consumer prices were to rise even higher due to surging energy and food prices. Pound for pound, Russia may be a bit-part player in the global economy these days but it is a major provider of food, gas, oil and other minerals, and sanctions could take a toll on the marginal pricing of those goods in global markets.

Europe, by contrast, has a lot more to lose, especially if the sanctions target Russia’s energy and financial sectors. Russia is the EU’s fifth largest trading partner, with imports of $188 billion and exports of $94 billion in 2021, according to Statista. And many European countries, including Germany, are massively dependent on imports of Russian natural gas. Around a dozen European countries procured more than half of their natural gas requirements from Russia in 2020, according to the European Union Agency for the Cooperation of Energy Regulators (ACER).

Ten Years of Sanctions

Russia has faced escalating U.S. and EU sanctions since the US enacted the Magnitsky Act in December 2012. Those sanctions were intensified in 2014 following Russia’s annexation of Crimea. The measures employed to date have included blacklisting specific individuals closely associated to the Kremlin, limiting Russia’s state-owned financial institutions’ access to Western capital markets, bans on weapons trade and other limits on the trade of technology, including for the oil sector.

Yet the sanctions have had little desired effect. All they seem to have achieved is to push Russia further along the path toward autarky as well as into the welcome embrace of China.

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