Dave here. Note that the latest set of EU sanctions (“sweeping”) were released today, as well as new ones from the United States. While the cut-off for Russian state-owned banks from purchasing long-term debt above 90 days’ maturity is seen as the most consequential action, the impact of these moves on, in particular, the export-driven German economy will bear watching in the coming months.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
The sanction spiral concocted by the US and the EU in response to the ever more tragic fiasco in Ukraine is supposed to force, or at least encourage Russian President Vladimir Putin to abandon whatever schemes he may have concerning Ukraine. So the 28 EU members are trying to hash out new sanctions today, to be duct-taped to the existing spiral that ineffectually jabs at 87 Russian individuals and 20 Russian organizations.
This time, the sanctions are supposed to have teeth. And a broad impact that would squeeze the Russian economy, much to the liking of the US government. Under discussion are, among other goodies, curtailing Russian banks’ access to EU capital markets and kicking the defense and energy sectors where European technologies play a big role.
But there is fear that the sanctions could bite back. Trade between the US and Russia is minimal. So it’s easy for the US to talk. Not so between Europe and Russia, and particularly between Germany and Russia. France has a lot at stake too. And much of Europe depends on Russian natural gas. Elegant compromises are needed.
So European Council President Herman Van Rompuy had a dream: the sanctions, he said, “should have a strong impact on Russia’s economy while keeping a moderate effect on EU economies.”
The “emerging consensus” is that only future contracts would be hit. This would allow France to deliver the first of two helicopter-carrying assault and command ships sold to Russia via a €1.2 billion contract, signed with fanfare in 2011. France’s economy and budget are in trouble, and this contract is of utmost importance to France. That France would not cancel the contract, whatever the pressures might be, has been clear for months [read…. France Thumbs Nose at Obama Over Sanctions: Will Deliver Two Warships to Russia].
And the sanctions against Russia’s energy sector would also be well targeted. They would of course spare the natural gas sector, given the EU’s dependence on Russian gas. Instead, they’d hit the oil sector.
Member states are hoping – because that’s the only thing left to do – that these additional sanctions will soon get Putin to see the light. And they’re hoping fervently because shrapnel from those sanctions as they blow up is already hitting Europe, particularly Germany.
The quasi-governmental Association of German Chambers of Commerce and Industry (DIHK) warned that exports to Russia are expected to plunge 17% this year from prior year, based on information the DIHK has received from German companies in Moscow and St. Petersburg.
And the DIHK is not exaggerating to score political points, though surely they’re trying to score political points. Exports to Russia have already gotten clobbered: In March, as the Ukrainian fiasco was developing, they dropped 7.2% year over year; in April, as the sanction spiral began to spiral out of control, they dropped 16.9%; in May, they dropped 17.5%. To bring the whole year down by 17%, the next few months would have to be even worse.
The German economy lives and dies by its exports. While Russia isn’t Germany’s largest trading partner, not anywhere near, it is important. In 2013, German exports to Russia had already dropped over 5% to €36.1 billion, triggered by the economic downturn in Russia. So the 17% plunge this year on top of last year’s drop would amount to a 22% swoon from the halcyon days of 2012. And now there are worries about the 300,000 jobs in Germany that depend on this trade with Russia.
“The German-Russian economic relations are currently heavily burdened,” Volker Treier, foreign trade chief of the DIHK, told the Handelsblatt. Many German companies in Russia are fretting that Russian companies are going to walk away from the relationship. “In part that has already happened,” he said. “Russian customers fear evidently that German companies would be unable to fulfill their delivery and maintenance obligations because of the threat of economic sanctions.” This fear is particularly widespread in the mechanical engineering sector, Germany’s forte.
As employee of a semi-government entity, Treier had to say what they always have to say, that it is of course the “primacy of politics” to exert political pressure on Russia. But it’s important for German companies “that the sanctions have a clear time frame, and that it’s clearly defined what is required to stop them” to make sure that the partnership won’t be burdened long-term.
German exporters are already frazzled by a broader economic slowdown of the BRICS – in addition to the steep slowdown currently underway in Russia. Last week, Treier had lamented that the DIHK had lowered its forecast of total export growth in 2014 to 4%, from 4.5% before the Ukrainian fiasco erupted. And “the renewed escalation of the crisis will likely cause us to lower our forecast again.” And that is going to hit the Germany economy, though it might not get a grinning Putin to budge.
Capital flight, particularly from the vast underground economy, is Russia’s most pressing economic problem. And Putin’s angle of attack is, well, brutal in its own way.