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EU Members are Unlikely to Issue Serious Sanctions to Russia over Ukraine

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Despite decrying Russia’s deployment of troops to the Crimea region and threats to boycott the forthcoming G8 summit in Sochi, EU members are unlikely to take any meaningful action against Russia in terms of economic sanctions, because of their reliance on Russia for gas. Gazprom, the Russian-owned gas company supplies around a fifth of the world’s gas, and around a quarter of the gas supply to EU countries in 2013. Russia could easily cut this supply off, which would severely disrupt EU economies that rely on it. Russia is likely to experience a decline in its FDI intensity however, and has already suffered a drop in the value of its currency.

Total Exports by Russia to EU-28 Countries 2009-2013

US$ billion

Source: Euromonitor International from International Monetary Fund (IMF), Direction of Trade Statistics

Many Key EU Countries still Dependent on Russia for Gas

Throughout the Ukraine are gas pipes that transport gas not just from Russia to the Ukraine, but also to EU countries. In 2006, following a dispute, Gazprom turned off the gas flowing through these pipes, so it is clear that this could easily happen again. As a result of the events in 2006, some EU countries did make an effort to diversify their energy sources away from Russia, but many are still far more reliant on Russia than they would like to be. Germany in particular is very reliant on Russian gas supplies, and imports more Russia gas than any other EU country.

Gas Supply Cut would Harm EU Economies

The winter of 2013-2014 has been mild and many EU countries currently have reasonably large stocks of gas as a result, meaning that if Russia did cut the gas supply to the EU off the effect would not be immediate. However, there is every possibility that the situation in the Ukraine could escalate further, and if the gas were cut, could continue to be for many months. This would cause fuel prices to increase dramatically increase across the EU, squeeze production costs and profit margins for businesses, and make the cost of living rise for consumers, eating into disposable incomes and hitting spending.

Lack of Meaningful Sanctions Proposed against Russia

There has been talk among EU leaders of boycotting the forthcoming G8 summit in Sochi, and also of blocking visits to EU member countries by Russian businesspeople. The reality though is that other G8 members, especially those in the EU, are unlikely to impose any heavyweight economic sanctions such as a boycott of Russian energy supplies, like the EU did when it suspended its oil imports from Iran in 2012. Any possible military intervention, or threat thereof by the EU is likely to result in Russia cutting the gas supply, meaning that intervention by EU members in the Ukraine is probably going to be minimal.

FDI Inflows to Russia Likely to be Hit

What will be likely to hurt Russia more than token gestures like non-attendance of G8 leaders at the summit, is the impact of the invasion and ensuing political uncertainty on its currency and its already declining FDI intensity levels. The value of the rouble has fallen significantly since Russian troops were positioned in the Crimea region. Russia’s FDI intensity, already down from 4.5% of total GDP in 2008 to 2.6% in 2012 (latest year available) is likely to fall further due to the negative impact on business confidence in the country. This will pose a major setback for Putin, who had hoped to increase its FDI intensity levels and was implementing business environment reforms in order to do so.

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