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Published On: Tue, Aug 19th, 2014

US, EU sanctions against Russia: Matters arising

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By Lawal Sale

There is no doubt that there is no love lost between the U.S, E.U and Russia over the recent annexation of Crimea, which Russia insisted that it was “reunification” and Russia’s alleged support for the so called Eastern Ukrainian “separatists”. (Crimea was once part of Russia until in the 50’s when it was gifted to Ukraine).The U.S, in its bid to punish Russia for these” offences”, slammed sanctions on targeted Russian officials, financial institutions, energy companies, defence industries and some perceived friends of President Vladimir Putin.  The sanctions also include travel bans, cancellation of contracts and freezing of bank accounts. Both President Vladimir Putin and Prime Minister Dmitry Medvedev have warned of the return of Cold War, arguing that sanctions “usually have boomerang effects” in the long run. This is because banning companies and individuals from doing business with a market of 150 million people will certainly have some adverse effects.

On its part, the European Union, unlike the U.S, is threading softly so as not to damage the of several member countries economy – many of which are still grappling with recession or recovering from the crisis. Although the E.U’s role as the world’s banker makes it a powerful block, using its power carelessly may drive non-Western countries like Russia to create alternative financing models. The E.U’s sweeping sanctions against Russia were mainly targeted at arms embargo, ban on Russian state owned banks’ access to western capitals, travel ban on individuals, export of hi-tech oil-production machinery and a total ban on equipment destined for deep water, arctic or shale production. These were all intended to put pressure on President Vladimir Putin to end Kremlin’s interference in Eastern Ukraine.

It is not surprising, however, that the E.U excluded the gas industry in its sanction list.This is, perhaps because of its dependency on Russian gas as the dependency of countries like Poland stands at 80%, Austria 70%, Germany 50%, Greece 70%, Netherlands 25%, France 25%, Czech Rep 90%, Finland 100% while some Baltic states also get between 70 and 100% of their gas supply from Russia. Ukraine itself depends almost entirely on Russia’s gas for its industries and heating.

Germany, on the other hand, was reluctant to get involved in the sanctionsand there are fears that if it goes ahead with the sanctions for a longer time, its economy will be hard hit as it is currently the biggest trade partner and beneficiary of Russia’s large market among all the 28 member E.U members. Trade volume between the two countries is said to be in excess of $50billion, while more than 25,000 German’s jobs could be in danger as a result of cutting off of business with Russia.  Germany’s major export items to Russiainclude machine tools, luxury cars and chemicals. German nationals also own more than 6,000 companies in Russia.

While more E.U countries went ahead with their “punitive” and “sectoral” sanctions against Russia, France said it would continue with its earlier contract for the supply of two Mistral assault ships to Russia because cancelling such an important deal would definitely not be in the interest of France. Russia also warned that though one Mistral ship has been supplied, the remaining balance of the payment will be made only after the second ship is delivered.

In its reaction to U.S and E.U sanctions, Russia introduced a one year ban on agricultural products import from the U.S and E.U, Australia and Norway except for baby food.This, will undoubtedly affect the revenue of European exporters who export roughly export more than 10% of its produce to Russia.As a result, Russians will have to prepare for adjustment in higher prices and the absence of the much-loved western cheese, milk, salmon, oranges, smoked-meat etc.Although, the ban may not have a serious impact on Europe’s economy, it will nonetheless land a serious blow on some farmers in Europe. This action by Russia, according to the E.U Ambassador to Russia, Mr. VygaudasVsackas, could cost the E.U members the sum of $16 billion and there are fears that the ban on Russian imports may draw Europe into a market crisis. Prices have already fallen Europe wide. Farmers were reported to have started demanding for compensation from their governments for the losses incurred.

The key E.U food suppliers to Russia are – Finland, Denmark, Spain, Netherlands, Italy, France, Poland and Norway. These countries export products such as; dairy products, meat, pork, fish and seafood, poultry products, fruits and vegetables in large quantities. The hardest hit among the countries are Norway (farmed salmon), Poland (apple), Netherlands (cheese) and Spain (oranges and fruits). The damages in the U.S would be very limited as it only exports chicken and grains, a venture which Brazil has already taken over.

The fears that the envisage food prices in Russia due to the ban will further worsen the already high inflation were allayed by the Agriculture Minister Nikolai Fyodorov, who acknowledged that the ban would only cause short-term spike in inflation. He stressed that there is no danger, as there are plans for substitute imports and increase in local production. Again, consumers were assured that the ban on food imports will only affect the premium market segment.

As a result, Russia is already looking for alternative food markets elsewhere to fill in the gap created by the ban on European agricultural products; talks are on top gear with Latin American countries like Brazil, Argentina, Chileetc. China, Egypt, Turkey, New Zealand and Customs Union Members of Kazakhstan, Belarus and Armenia are also on the list of new food suppliers to Russia.

In another development, Russia is also in talks with its allies in Custom Union members so that no Western goods come to Russia through their territories. Although, under the ban, individuals can purchase goods including food, from the sanctioned countries and bring them into Russia for personal consumption. Russia is also making efforts to boost local food production that so as to completely stop its dependency on food imports by allotting the sum of $50 billion to its farmers as initial support.

Statistics show that Russia consumes about 4 million tons of poultry and 3.5 million tons of pork a year. Annual import quotas stood at 360,000 tons of poultry and 430,000 tons of pork.Consequently, despite the numerous sanctions against Russia and the retaliatory ban on agricultural products import by Russia, patriotic feeling still runs high and Mr. Putin is gaining increased goodwill and popularity from his people who view him as a hero; just as his public approval ratings remain at their highest level of 83% in July 2014.All the same, as both sides are feeling the heat due to the sanctions and counter- sanctions, political solutions need to be applied in efforts to tacle the crisis in Ukraine. Direct, genuine, and honest dialogue should take place between the Kiev government, Russian government, and E.U and U.S leaderships.

Lawal Sale, a foreign affairs analyst, is reachable on lawalmaida1@yahoo.com

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