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Divided we stand: Where do EU states stand on further sanctions on Russia?

16 Apr 2014

Summary: There is a huge diversity of views within the EU on what to do next with regards to Ukraine and Russia. This is mostly down to divergent interests (economic, political and cultural) for different member states, as well as varying views on the effectiveness and implications of further sanctions. Countries range from Poland and the Baltics, which have very strong economic links with Russia but remain very hawkish, likely due to historical experience, to countries such as Bulgaria and some Mediterranean countries which remain quite dovish. Open Europe has attempted to quantify this on a Dove/Hawk scale from -5 to +5. The average ranking for EU members is 0.4 suggesting that the bloc as a whole remains someway off from finding the unanimity needed to push further sanctions. 

In terms of trade links to Russia, Lithuania has the largest trade turnover at almost 32% of its GDP, while the Netherlands, Slovakia and Estonia also have high levels at 11%, 11% and 14% of GDP respectively. There is however, no strong link between deeper trading links and a more dovish approach to sanctions on Russia, suggesting the discussions are informed by a number of complex factors.  

Where do EU member states stand on sanctions on Russia, and why?  

On 6 March, EU leaders agreed a three staged programme of sanctions against Russia based on its actions over Ukraine. They stressed that stage three would involve adopting “additional and far-reaching consequences for relations in a broad range of economic areas” between the EU and Russia, if Russia takes any further steps to “destabilise the situation in Ukraine”.  

Over the past few days the situation in Ukraine has escalated significantly, however, EU foreign ministers on Monday decided that the threshold for stage three of sanctions had not been met. Nevertheless, they did leave the option of further action open. With the situation continuing to look increasingly unstable, the key questions now are: how will Europe respond? If it does respond, what will the economic and financial fallout be?  

Based on recent public announcements, Open Europe has put together a scale which attempts to pin down where each EU member state stands on further sanctions against Russia. The scale runs from -5 to +5, with -5 being the most ‘dovish’ – i.e. against further sanctions – and +5 being the most ‘hawkish’ – i.e. in favour of further action against Russia. The scale is not meant to suggest which position is preferable. It is simply an attempt to pin down where each country stands.[1] This is then plotted against the total trade turnover each country has with Russia (as a % of 2012 GDP).[2] This allows the picture to factor in economic links to Russia.    

Source: Open Europe and Russian Federal State Statistics Service[3]

The scale highlights the severe divergence in views amongst EU member states, which is clearly hampering the decision making process. There are some countries (notably Poland and the Baltics), which believe Russia is directly to blame for increasing instability in Eastern Ukraine and, therefore, favour strong and direct economic and financial sanctions on Russia, as well as clear demonstrations of support for Ukraine.  

On the other hand there are countries (such as Bulgaria, Luxembourg and some of the Mediterranean countries), which do not see a direct Russian hand (at least publicly) in the recent events and, therefore, are not willing to take any measures which could escalate the situation further.  

It is important to ask what is driving these differences but, as is often the case in Europe, there are a number of factors at play. As the graphic suggests, there is no strong correlation between the two indicators. There is a slight correlation between higher trade turnover and ‘dovishness’,[4] but, it is far from conclusive and is certainly not evidence of causality. Furthermore, some of the countries with the deepest links to Russia (such as Lithuania, Poland and Latvia) also have the most hawkish position – this is likely informed by their own historical experience with Russia and concerns over their own security.  

Other countries more removed from the situation, at least in terms of geography, are more likely influenced by their broader concerns that further sanctions could increase political and financial uncertainty in Europe.  

What form could further sanctions take?  

Currently the sanctions have been focused on asset freezes and visa bans for individuals. However, there remains a distinct possibility that they could be increased, although given that the average ranking of an EU state on our scale is 0.4, it suggests that as a bloc the EU remains someway from the unanimity required to push further sanctions.[5]  

In our previous briefing, we examined the areas for potential sanctions in detail. Broadly, economic sanctions could take the form of: sectoral sanctions, sanctions on specific firms or broader financial sanctions.  

Limiting exports of specific sectors to Russia (such as technology and medical goods): The EU could adopt more targeted sanctions on specific areas of the economy where Russia is reliant on external trade. As the graphs below show, while Russia is strong on exports of ‘mineral products’ (such as oil and gas) and almost self-reliant in agriculture, it is less so on things such as machinery and chemicals. Targeting sanctions on exports to Russia in these areas could have a more profound impact, since Russia may find it easier to diversify sales of commodities than source new products. While Russia does have a diversified import base, it still purchases over 50% from the EU and US. This gives them a strong position to leverage, but also highlights the cost of sanctions will likely be decreased exports.    

Source: Russian Federal State Statistics Service

Target sanctions against specific firms: Given the links between the two economies, there is no shortage of Russian firms with sizeable investments in Ukraine and links to the Russian government. The most obvious example is Gazprom, [7] which supplies the large majority of Ukrainian gas. However, Russian banks such as Sberbank, VEB and VTB are reported by Reuters to have $28bn in exposure to Ukraine.[8] Russian mining and metal companies own numerous mills, plants and mines in Ukraine, while Russian telecoms firm MTS was the second largest mobile provider in Ukraine.[9] Russia’s flag carrier Aeroflot also has numerous slots in Ukrainian airports. In any case, such sanctions are not without challenges. Overtly banning trade with such firms would likely create a significant number of legal challenges.  

Limit financial access of Russian firms and government: This would involve targeting sanctions to lock Russian firms and/or government out of US and EU financial markets. Despite its strong current account surplus, low external debt and positive net international investment position, Russia remains reliant on the large liquid financial markets of the EU and US. Shutting out Russian firms from these markets could provide an effective mechanism to squeeze the Russian economy. Russian corporate financing, equities and to a lesser extent government bonds are reliant on external financing due to the huge capital outflows from the Russian economy.[10] As the graphs below show, the external debt of Russian firms is significant, with $121bn (6% of GDP) needing to be rolled over in the next 12 months.[11] Furthermore, the level of money flowing out of the economy has been substantial – equal to 20% of GDP between 2008 and 2013, and picking up to $51bn outflow in the first quarter of this year.    

Source: Central Bank of Russia[12]

On top of such economic sanctions, further political actions such as arming Ukrainian troops, boosting NATO’s military presence in Russia’s neighbourhood and deepening trade and political ties between the EU and Ukraine remain possible. As with all these actions, Russian retaliation remains a serious concern.  

For more information contact Raoul Ruparel on +44(0)757 696 5823 or the office on +44(0)207 197 2333.   

[1] The scale is based on a variety of factors including public communication from foreign ministers and leaders of EU member states, as well as research by Open Europe. In particular, the comments around the most recent foreign ministers meeting in Luxembourg on Monday 14 April 2014 have been taken into account to provide as up to date picture as possible. The scale is not exhaustive and there are often differences within governments around the desire for further sanctions. Ultimately, the scale is meant as a neat way to provide a rough guide to the views across Europe on Russia. Data for Croatia, Estonia and Latvia are taken from their national statistics agencies.

[2] Data on trade is taken from the Russian Federal State Statistics Service and then calculated as a percentage of each country’s GDP based off data from Eurostat. However, the data does not cover every EU member therefore it is supplemented by data from national statistics services. Data for Croatia only covers goods.

[3] Russian Federal State Statistics Service, External trade of Russian Federation with other countries and by commodity structure: Data for Lithuania are taken from the CIA World Factbook. Data for Croatia, Estonia and Latvia are taken from their national statistics agencies. 

[4] This is when discounting Lithuania given that it is a significant outlier in the results.

[5] Further sanctions at the EU level will require unanimity. This highlights that, while the EU average given is un-weighted, this is the correct approach since every member has one vote in this instance.

[6] Russian Federal State Statistics Service, External trade of Russian Federation with other countries and by commodity structure:

[7] Morgan Stanley Research, Russia Economics and Strategy, 14 March 2014.

[8] Cited by Reuters, ‘Factbox – Russian companies with exposure to Ukraine, 4 March 2014:

[9] Cited by The Moscow Times, ‘Russian firms monitoring Ukraine exposure’, March 2014:

[10] For a wide discussion of the financial links to Russia, in particular on the part of the City of London, see our flash analysis, ‘The Battle of Londongrad – how vulnerable is the City to financial sanctions on Russia?’, 21 March 2014:

[11] Central Bank of Russia, Payment Schedule of External Debt of the Russian Federation. Between April 2014 and the end of Q1 2015, see:

[12] Central Bank of Russia, Net Inflows/Outflows of Capital by Private Sector in 2005-2014:

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