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Sanctions on Russia: Why a lot more than Europe's energy is at stake

The natural gas trade is both Brussels' biggest weapon and biggest vulnerability. But a trade war with Moscow would be costly in other ways too.

By Sara Miller Llana, Staff writer / March 20, 2014

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EU foreign ministers talk to each other at the European Council building in Brussels on Monday. Europe is deciding whether to impose new sanctions on Russia over its military intervention in Ukraine. But economic sanctions could hurt Europe as much as Russia, in a variety of industries.

Yves Logghe/AP

Paris

As European Union leaders meet today to consider toughening sanctions on Russia, energy is not the only factor that will bring them pause.

European nations have a vast and complex economic relationship with Russia, depending on it not just to supply gas but as a market for luxury goods, a purchaser of warships, a place for companies to expand, and clients of British banks and London real estate agents.

To be sure, energy is the key factor as they weigh the repercussions of issuing even tougher sanctions on Russia, after its annexation of Crimea. Russia supplies about 30 percent of the EU’s gas needs, making an economic war much higher stakes for the EU than the US, as The Christian Science Monitor reported.

Today, the world is watching to see whether Europe decides that Russian's actions in Crimea have crossed a “red line,” forcing Brussels to put into action the “far-reaching consequences for relations in a broad range of economic areas” that it threatened two weeks ago in an emergency summit, if Russia doesn't step back.

Here are economic forces, beyond energy, that could play into that decision:
The EU as a whole is the most important investor in Russia, according to the European Commission, which estimates that up to 75 percent of foreign direct investment stocks in Russia come from EU member states.

Germany’s dependence on Russia for its energy needs is no secret, but less well known is how much German companies have spread into Russia in recent years. More than 6,000 companies are registered there and together have invested 20 billion euros, according to a report in Spiegel.

Germans are weary of legislation, already under discussion in the Russian parliament, that would make it easier for the state to nationalize foreign assets, says Roland Freudenstein, deputy director and head of research of the Wilfried Martens Center for European Studies in Brussels.

He says some 300,000 to 400,000 jobs depend on German-Russian trade. That might explain why opinion polls show a public disinclined to push for tougher economic sanctions. In the latest one, by Forsa on March 13, only 24 percent of respondents said they believe that sanctions would be effective in resolving the crisis.

Russia is the third-largest trading partner of the EU, according to the European Commission, and the EU is the largest trading partner of Russia. EU exports to Russia are dominated by machinery and transport equipment, chemicals, medicine, and agricultural products.

The countries that trade with Russia would have much to lose by tougher sanctions, a point that French Foreign Minister Laurent Fabius underscored on Tuesday. France has a $1.4 billion contract to sell two warships to Russia, on which 1,000 jobs depend. Mr. Fabius said France would consider suspending the contract, but only if other EU countries shared the burden.

"There is no reason why it should only be France who takes this kind of action," he told French radio station Europe 1. "On the one hand, we cannot envisage supplying Russia indefinitely with arms, given the way it has behaved, on the other hand, there is the reality of jobs and the economy."

The luxury goods markets, from companies like Ferrari to Prada, would also suffer.  “Luxury companies lean very heavily on the Russian market, from high-end [appliances], like very well-made washing machines and dishwashers. You then have European luxury cars and luxury fashion,” says Kathleen Brooks, director of research at Forex.com in London.

When British Foreign Minister William Hague this week called for the bloc to suspend military exports to Russia, France retorted that British banks must respond by seizing assets of wealthy Russians. On TF1 television Monday, Fabius said France, if it were to suspend its warship contract, would expect Britain to "do the equivalent with the assets of Russian oligarchs in London. Sanctions have to touch everyone."

Wealthy Russians have bought up homes in the South of France or inked deals in Luxembourg, but it is in London where they’ve had the most impact, a fact detailed in a 2010 book titled “Londongrad.” Though exact figures are unknown, anecdotal evidence of extravagant private Russian investment in London is well and broadly documented.

“London, and of course Britain, has a good deal to lose because of the amount of Russian money that’s been … laundered through London,” says Anatol Lieven, a professor of international relations at King’s College London. “If the Russians ... sell off their houses that will certainly damage the city of London, at least high-end London property prices.”