EU-Russia Sanctions: An Unsteady Deadlock

The European Union and Russia have been locked in an economic struggle over Ukraine for two years. With Donald Trump the next president of the United States, the West’s Russia policy might substantially change – and Europe’s Eastern policy is today more uncertain than ever.

In July 2014, following Russia’s unilateral annexation of Crimea and support for rebels in eastern Ukraine, the EU imposed substantial economic sanctions on the country, including limits on access to finance, a ban on exporting high technology to Russia’s energy sector, and travel bans on senior Russian officials.

Russia for its part retaliated with a ban on the importation of many food products, including most meats, fish, vegetables, fruits, and dairy products, particularly hurting nearby EU countries such as Finland and the Baltic states. These measures have been maintained ever since. The sanctions have coincided with a collapse in trade between the two economies, which had previously seen a steady growth in commercial relations.

In the early 2000s, Russia had been on a positive economic trajectory following the chaotic Yeltsin years of transition from communism. In 2012, the country succeeded in joining the World Trade Organization (WTO) and became formally committed to international trade. At the WHO, Russia is in a large number of trade disputes with the EU and has become notorious for instituting various apparently politically-motivated import bans against the EU, the U.S., or neighboring countries, often citing health reasons.

Nonetheless, as the Bertelsmann Stiftung’s Transformation (BTI) points out in its 2016 Russia report, “Foreign trade has been liberalized and the remaining restrictions are no more extensive than those found in other OECD countries.”

As result, the spectacular rise in Russian standards of living had meant great opportunities for European exporters. Until the 2007-8 global financial crisis there was a steady rise of trade between the EU and Russia. And indeed, trade in goods rapidly recovered after the crisis, rising from €185 billion in 2009 to €339 billion in 2012. Since then however, trade has fallen to crisis-era levels, hurting both the European and Russian economies.

Neither side wants to back down

The result has been a suboptimal equilibrium, both sides being somewhat hurt, but neither willing to back down, especially as both economies have since seen improvement. The EU, particularly its inner core, the Eurozone currency union, had been struggling for years in the face of the 2007-8 financial crisis and a largely self-inflicted sovereign debt crisis in 2011.

Since then however, thanks to low oil prices, a reinforcing of the Eurozone’s economic governance, and unprecedented action by the European Central Bank (ECB) to prevent the default of any Member State, the European economy is enjoying a recovery. There has been steady if uneven growth of over 1.5% of GDP in 2015 and 2016. Unemployment has fallen to its lowest level in five years, though the situation remains painfully bad even in major states such as France and Italy.

Russia’s food ban had a substantial media impact in many EU countries, especially neighboring ones and those with struggling farmers. However, the European Commission’s economists have found that Russia’s measures have not had a major impact on the EU economy overall, despite the pain in certain sectors.

In 2015, the EU exported goods to the world worth almost €1.8 trillion, whereas the exports affected by the Russian ban were only worth €5.2 billion (based on data for 2013), less than 0.3% of the EU’s total exported goods. The potential impact was however substantial in affected sectors, given that around a quarter of the EU’s dairy, fruit and nuts, and meat exports had been directed towards Russia. EU farmers were far more affected by the ban than were other countries. The Commission’s economists found however that EU farmers were largely able to find alternative buyers for their products.

EU exports to Nigeria, Switzerland, Korea, Canada, and Taiwan significantly increased in the second half of 2014. The economists conclude: “The impact of the ban on total extra-EU exports is negligible in relative and absolute terms… EU total exports would decrease by merely 0.02% providing an evidence for a strong cushioning effect of the EU Internal market.”

Russia’s export competitiveness has risen dramatically

On the Russian side, the situation has also been mixed. As the German magazine Der Spiegel reported, the food ban has been a boon to Russian farmers, protecting them from EU competition. Together with a declining ruble, Russia’s export competitiveness has risen dramatically. Russian agricultural exports have for the first time surpassed that of weapons and in 2015 Russia also for the first time produced more grain than the United States. Russian farmers have however struggled to increase production of vegetables and milk. Furthermore, the gains for farmers have been paid for by Russian consumers, with high inflation in food prices, reaching over 25% in 2015.

The general Russian economy has considerably suffered since the sanctions were imposed, although this may have more to do with the decline in oil prices, which have deprived the country of a massive source of revenue. There followed recession, inflation of over 16%, a fall of the ruble of up to 40%, and the exhaustion of Russia’s strategic reserve fund accumulated from fossil fuel profits.

While the Russian recession is largely over, growth has not returned. All is not black however: Russian unemployment is low and has even declined to 5.2% and public debt remains low at less than 20% of GDP.

Russia’s economic travails have had an impact on its Eurasian allies. Belarus was forced to devalue its currency to continue exporting to Russia and there have been tensions surrounding a Belarusian spike in food exports to its eastern neighbor, taking advantage of the gap left by previous EU exporters.

Russia has however continued to develop its Eurasian Economic Union (EEU), significantly modeled on the EU, with members including Belarus, Kazakhstan, and Armenia. The EEU may well form a genuine common market and many Central Asian economies have considerable growth potential. This bloc however will continue to be dwarfed by the EU, with its market of over 500 million consumers and considerably higher GDP per capita. Russian officials continue to call for increased cooperation in trade between the EEU and the EU. The Global Economic Dynamics project of the Bertelsmann Stiftung has analyzed the economic effects of such a free trade area in a recent study.

The European consensus against Putin’s foreign policy could shatter

The situation then has all the characteristics of a stalemate. Change may occur because of Ukraine itself. While the EU and Russian economies are relatively stable, the Ukrainian situation is catastrophic, with collapses in GDP, the national currency, and real incomes. This bodes ill for Western influence in Ukraine, as BTI notes in its 2016 report on Post-Soviet Eurasia: “Since, in times of doubt, many people put their own obvious interests above more abstract potential gains, the EU risks seeing its attractiveness dwindle if it continues its current reticence.” In the absence of more concrete guarantees from the West, whether economic or military, Ukraine’s alignment with Brussels and Washington seems insecure.

Furthermore, while the American and European economies are performing decidedly better than Russia’s today, the political situation is something of a negative mirror image. Russian President Vladimir Putin has enormously benefited from the conflict with the West through a “rally-round-the-flag” effect: his approval ratings have since consistently topped 80%.

Across the West, in contrast, the situation is far more unstable with question marks everywhere: the EU itself will be lessened by Great Britain’s vote to depart from the bloc, the Italian government lost a constitutional referendum leading Prime Minister Matteo Renzi to resign, and French President François Hollande languishes with a 4% approval rating has now waived his candidacy for a second term of office.

Most daunting of all for analysts is Donald Trump’s election as president of the United States, with unclear and potentially revolutionary implications for the West’s Russia policy. The EU, which requires unanimity to impose sanctions, had long been limited in its approach by relatively pro-Russia states like Hungary and the Czech Republic, to be joined by Bulgaria. If Trump emerges as a rare pro-Russia American president, the European consensus against Putin’s foreign policy could well shatter. Nothing seems more uncertain than Eastern policy today.

Frank Beauchamp is a European political analyst and writer. He writes for the Bertelsmann Stiftung’s BTI Blog and SGI News.