Handelsblatt Exclusive

Russian Sanctions Likely to Continue

Putin AP
Russian President Vladimir Putin is extremely unhappy with the economic sanctions.
  • Why it matters

    Why it matters

    The European Union hopes to pressure Russia into changing its course on Ukraine by extending its economic sanctions.

  • Facts

    Facts

    • The trade restrictions are scheduled to expire at the end of January next year.
    • A compromise under discussion is to extend the sanctions by six months.
    • Russian industrial production has declined by 2.8 percent, and GDP sank by 4.6 percent in the third quarter of 2015.
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    Audio

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The European Union appears unwilling to budge on its economic sanctions against Russia just yet.

A majority of European leaders want to extend the restrictions against the country by a further six months, when they meet next month at a European Union summit, Handelsblatt has learned from sources in Berlin and Brussels.

“There are no grounds for lifting the sanctions,” one source said.

The trade restrictions are scheduled to expire at the end of January next year. But while southern European member states lean toward lifting the sanctions, those in the east want to see the sanctions further tightened.

A compromise under discussion is to extend the sanctions by six months – an approach favored by German Chancellor Angela Merkel who would like to mend the damaged relations with a key trade partner, sources said.

Ms. Merkel has tied the lifting of sanctions to a full implementation of the Minsk II peace agreement, signed in February.

Russia President has called the sanctions a  “violation of international law,” complaining that they are damaging not only the the Russian but also the global economy.

German Economics Minister Sigmar Gabriel caused a furor in October last year when, in talks with Mr. Putin, he proposed a step-by-step easing of sanctions in exchange for Russia’s cooperation in Syria.

Chancellory Chief Peter Altmaier, however, made it clear that Germany was not prepared to change its position on the Ukrainian conflict.

Ms. Merkel has tied the lifting of sanctions to a full implementation of the Minsk II peace agreement, signed in February. But the implementation remains in its early stages.

“At the moment, Russia is doing everything to maintain a semblance of implementing the terms of the agreement,” a source in the German government told Handelsblatt, “while placing the blame for setbacks at Ukraine’s feet.”

Opinions are divided on whether the sanctions against Russia are working.

Last month in Sochi, Mr. Putin told the Valdai International Discussion Club, a group of international experts focused on Russia and its global relations, that the sanctions had played a role in Russia’s economic downturn, but were not the primary problem. Russia’s economic woes, he said, were due mainly to falling commodity prices, especially oil, gas and base metals, which are Russia’s main exports. The Russian economy is heavily dependent on these exports.

The German Institute for Economic Research, or DIW, agrees, at least in part.

rubel_us and eu flag_imago
The economic restrictions have put the Russian economy in a pinch. Source: Imago

 

“The financial sanctions imposed by the West over the annexation of Crimea play only a secondary role,” DIW analysts wrote in a report. The analysts concede, however, that this development may only be short term and that “in the long-run the sanctions could thwart the Russian economy.”

Ms. Merkel hopes they put further pressure on Russia.

In July 2014, the European Union brought the first set of financial sanctions to bear on Russia, including a ban on arms and civilian goods with potential military uses. It also slapped restrictions on access to European capital markets for the big Russian banks and forbid European industry to provide certain services to the Russian energy sector.

Independently of the financial sanctions, Brussels introduced punitive measures against senior Russian officials, military brass and oligarchs, who contributed directly or indirectly to the Crimean annexation.

But it is in fact Russian citizens who are shouldering the burden of the sanctions and paying the price of Mr Putin’s response to them, analysts argue. For the first time since Putin’s appointment in 2010, real wages have fallen – by more than 10 percent.

Low-income Russians are being hit the hardest by skyrocketing food prices. Mr. Putin has imposed a ban on the import of western foodstuffs.

To make matters worse, the economic situation in Russia is worsening, according to Moody’s, the ratings agency. In spite of import substitution, industrial production has declined by 2.8 percent, and the gross domestic product sank by 4.6 percent in the third quarter of 2015.

 

Russia's Economy-01_REVISED

 

Mr. Putin had tried to strengthen Russia against China and replace imported products with domestically produced items, but that move, too, has backfired. Trade with China fell by 29 percent in the first eight months of 2015.

Moscow’s policies could have further damaging consequences, according to DIW researcher Konstantin Kholodilin.

“The lifting of the base rate means that interest rates have risen across the board,” he said, “and that has a negative influence on investment.”

A plummeting ruble adds to Moscow’s problems. On January 1, 2014, a dollar was worth 32 rubles. The gap has widened considerably since then, to about 63 rubles.

In an effort to prevent the ruble from falling further, Russia’s central bank has intervened with currency reserves.

There are many other problems. The billions disbursed in aid for ailing banks and companies during the crisis, for instance, have reduced the Russian foreign exchange reserves of $469.6 billion on January 1, 2014 to $322.4 billion in late September 2015.

Because the main state-owned banks are on the western sanctions lists, their access to foreign finance is severely limited. Even Chinese banks can’t make up the shortfall, making trading considerably more expensive, Andrei Kostin, head of VTB Bank, told Handelsblatt.

In spite of the billions in government aid, some banks went belly-up.

Irakli Pipia, Vice President of Moody’s ratings agency, said that the economic conditions have had “adverse effects on banks’ asset values and their profitability,” which led to the downgrading of Russian banks.

Russia’s automotive sector is also in a slump. In the first three quarters, 1.2 million cars were sold, or one-third fewer than in the same period a year earlier. Russian carmaker Lada reported 28 percent fewer registrations from January to September 2015.

 

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. Mathias Brüggmann is the head of Handelsblatt’s foreign affairs desk, leading the coverage of the Ukraine crisis. Thomas Sigmund is the bureau chief in Berlin, where he directs political coverage. To contact the authors: berschens@handelsblatt.com,  brueggmann@handelsblatt.com and sigmund@handelsblatt.com

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