Europe Undermines US Sanctions Against Russia

Europe Undermines US Sanctions Against Russia

The European Union undercut the United States’ sanctions against Russia by failing to match America’s April 28th sanctions against 17 high-tech companies that are directly owned or controlled by Russian President Vladimir Putin. Although the EU issued “enhanced” sanctions against individuals, they still have little financial effect.

The EU action follows President Obama’s press conference with reporters in Manila, Philippines on April 28th that the U.S. was “enhancing” American sanctions to spur Putin to “walk the walk, not just talk the talk” in resolving the crisis in Ukraine. The president emphasized that U.S. sanctions not only slap visa bans and asset freezes on seven Russian government officials, but they also specifically target 17 high-tech companies that are directly owned or controlled by Russian President Vladimir Putin. 

Later on the 29th, U.S. Secretary of State John Kerry tried to appear unfrazzled by the EU’s undermining of America’s leadership. He pledged in an address to the Atlantic Council, a Washington think tank, that “NATO would stand united to defend its members’ territorial integrity.”

Although leaks indicate that the Obama Administration had originally considered levying sanctions against Russia’s energy infrastructure, Bulgaria and several other European Union (EU) nations in the Balkans and Central Europe refused to participate. 

Despite the Ukraine crisis, many Central and Eastern European countries keep moving forward to expand energy relationships with Russia. Between 2008 and 2010, Russia’s energy giant Gazprom signed memorandums of understanding with Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia, and Austria for the construction of the “South Stream Pipeline.” 

The pipeline would deliver up to 700 billion cubic feet of natural gas to Europe by crossing the Black Sea to Bulgaria, allowing Gazprom to supply its customers in Europe without sending exports through the rebellious Ukraine. Bulgaria would benefit from improved energy security and energy transit fees as the new gas distribution point for much of the Russian exports to Europe.

The European Union leadership has opposed the pipeline, which it says violates European Union legislation that mandates energy production and transmission. Late last year, the EU Commission said member states must renegotiate their agreements with Russia. But Bulgaria and the Balkan states continue to push for the construction of the pipeline that would deliver gas at as much as a 40% discount from current prices. 

According to leaks, the Obama Administration was considering economically painful sanctions against Gazprombank, the financial entity that handles many energy transactions for state-owned energy giant Gazprom, and Vnesheconombank, the Russian Development Bank that handles billions of dollars invested in Central Europe.

Washington apparently also considered banning Visa and MasterCard transactions, which processed 95% of the $740 billion in Russian retail credit card transactions in 2013. By targeting the transaction payment systems, Russia could have been temporarily crippled. Russian President Vladimir Putin said last week, “We have always believed that our partners, both Visa and MasterCard, are depoliticized economic entities and companies. However, as it turned out, they too are under strong political pressure and influence and give in to it right away.”

Russia is expected to ceremonially retaliate against the U.S. expansion of sanctions by targeting more American politicians. But Moscow will avoid targeting any meaningful American businessmen or companies, such as ExxonMobil. 

The United States can levy very punitive financial sanctions against Russia. But any effective American economic targeting risks Russia retaliating by cutting off energy shipments to Europe and reneging on over $100 billion in debt held by European and American investors. With the Obama Administration unwilling to risk the blow-back, the “enhanced” sanctions will be no more effective than the current sanctions.

The author welcomes feedback and will respond to comments by readers.