By PTI
FRANKFURT: Europe is contemplating sanctions against Russia if it invades Ukraine, and the work is far from simple.
Sanctions would seek to maximize the pain for the Kremlin, its key banks and energy companies but also avoid jeopardizing the continent’s Russian-dependent energy supplies or inflicting too much damage on European companies with strong ties to Russia, including German industrial manufacturer Siemens AG, Italian tiremaker Pirelli and automakers like Volkswagen and Mercedes-Benz.
Russia has ties to world energy and financial markets and is home to major foreign partnerships and investments, so any measures will have repercussions outside the country.
The question is how much.
The European Union’s executive commission isn’t revealing the sanctions it’s discussing in order to leave the Kremlin guessing.
Officials say measures would be more sweeping and severe than those imposed in 2014 after Russia annexed Ukraine’s Crimea peninsula.
Here are places where sanctions could affect Europe’s economy:
WAITING FOR WORD
Given that it’s not known what the measures would be, European corporations are warily watching developments and limiting their comments to hopes for a diplomatic solution.
BMW said “politics sets out the rules within which we operate as a company” and that “if the framework conditions change, we will evaluate them and decide how to deal with them.”
Siemens AG, which gets about 1% of its revenue from Russia, is developing a new generation of high-speed trains with Russian partners to be built at a plant there.
Siemens Energy, part-owned by Siemens AG, is building power plants and equipment for 57 wind farms in Russia.
European automakers have an extensive presence.
Volkswagen, Stellantis, Renault and Mercedes-Benz have factories in Russia, while BMW makes cars there through Russian partner Avtotor.
France’s Renault owns Russia’s biggest carmaker, Avtovaz, with its sprawling plant in Togliatti.
Stellantis plans to import commercial vans under its Peugeot, Opel and Citroen brands from its plant in Kaluga to meet Europe’s increased demand for delivery services.
Italian tiremaker Pirelli, which is Chinese owned, operates two factories employing some 2,500 people in Russia, producing tires mostly for the domestic market but also for export.
“We continue to invest, and we believe in the development of the Russian market and internationalization,” CEO Marco Tronchetti Provera told reporters last month.
“We believe that even in crises, we must find a meeting point, and we believe that equilibrium will be found in the end.”
He and other CEOs met with Russian President Vladimir Putin last month to discuss business prospects.
Italy’s agribusinesses lost big when Russia imposed retaliatory import bans on produce, cheese and meat in 2014.
Despite the new tensions, the Confartigianato association of craftsmen in Italy’s northeastern Vicenza province is pressing ahead with a virtual product fair in Moscow next month.
Those seeking to participate include the makers of Panettone Christmas bread, Colombo Easter bread and winemakers, products that don’t fall under the embargo.
Likewise, Italian bank Intesa SanPaolo, which supports Italian businesses in Russia, says its mission hasn’t changed.
“Frankly, we don’t do geopolitics,” CEO Carlo Messina said.
“We respect the rules, but we serve Italian customers, and we do it in all countries, including in Russia. If the rules should change and present an impediment, we will take the necessary steps.”
WHAT SANCTIONS WOULD HIT
Much of the discussion has centered on big Russian banks, which could face measures from limits on borrowing to restrictions on transactions involving dollars.
Another target could be energy companies such as Rosneft and state-owned Gazprom, which could face bans on borrowing from Western investors and creditors.
That would limit their ability to invest in new projects but would not immediately cut off energy supplies to Europe, which gets some 40% of its natural gas from Russia and is facing low reserves and high prices this winter.
AVOIDING BLOWBACK
A key aspect will be to avoid disproportionate losses to Europe’s economy or companies.
Otherwise, it may be difficult to rally support among the 27 EU member governments, which would have to agree unanimously on sanctions.
For example, Russian natural gas producer Novatek could be a possible target for sanctions, but 19.
4% of the company is owned by France’s TotalEnergies, meaning harsh sanctions would require some “diplomatic finesse” given the connection to a NATO ally, said former U.S. diplomat Dan Fried, who crafted the 2014 sanctions against Russia.
Sanctions also could open the door to competitors from China and other countries that wouldn’t punish Russia.
After the 2014 sanctions banned exporting equipment with potential military use to Russia, some smaller German machinery companies gave up rather than deal with the bureaucracy and risk of unintentionally violating complex rules.
As a result, Chinese machinery makers surpassed German ones as suppliers to Russia in 2016.
Overall, the number of German companies doing business in Russia dwindled from 6,000 in 2010 to 3,500 in 2021.
However, Conflict Armament Research, which investigates supply chains for weapons of war, found that Russian entities still acquired British, Czech, French, German, Spanish and U.S.-made components for military-grade spy drones.
In a November report, CAR said the parts were discovered in downed or crashed drones in Ukraine and Lithuania.
Lead author Damien Spleeters said companies making electronics that can be used for both civilian and military purposes aren’t generally required to check on the end use of their sales ahead of time.
WALLED-OFF RUSSIA
The Kremlin has taken steps to reduce its economic dependence on other countries and outside sources of financing.
It has low government debt and $630 billion in reserves of foreign currency and gold.
Russian companies have pushed to source parts locally, even when working with European partners.
But Harley Balzer, an expert on Russian-Chinese relations and an emeritus professor at Georgetown University, wrote in a recent analysis that despite those efforts, “localization is highly vulnerable to additional sanctions.”
Barring Russia from getting U.S. electronic components could be a key pressure point, he says, because Russian defense industries import some 20-30% of their electronics and China doesn’t produce the sophisticated chips and processors Russia needs.
MODEST IMPACT?
While Russia is a major energy supplier, it sends few other goods to Europe.
“Despite its size and potential, Russia’s badly managed economy is not a major market for Europe,” said Holger Schmieding, chief economist at Berenberg bank.
Germany, Europe’s biggest economy, sends only 1.9% of exported goods to Russia, compared with 5.6% to neighbor and fellow EU member Poland.
Schmieding said Europe is almost through winter and could probably manage any temporary drop in natural gas from Russia.
A long-term reduction isn’t in Russia’s interest.
“Some losses in non-energy trade with Russia as a result of sanctions and countersanctions would likely have an almost negligible impact on Europe’s growth outlook beyond the next one or two months,” he said.
A Russian invasion of Ukraine would be devastating, and a wider European war even worse.
Whether a larger war happens would depend partly on President Vladimir Putin’s ambitions, partly on the West’s military response, and partly on plain luck.
Although US and European officials have said for days that a Russian invasion appeared imminent, Putin’s government on Tuesday publicly welcomed further security talks with the West.
It also announced that some of its forces bracketing Ukraine will be returning to their regular bases, although US and other Western officials said it was too early to tell whether the invasion threat had receded.
War by its nature is unpredictable, and the stakes are enormous, not just for an overmatched Ukraine but for Europe and the United States.
At risk, arguably, is the European security order established after World War II and then altered peacefully with the reunification of Germany, the demise of communism in Eastern Europe, the collapse of the Soviet Union and the expansion of NATO.
President Joe Biden has said he will not fight Russia in Ukraine, nor would America’s NATO allies.
So a Russian invasion would not automatically trigger a wider war.
But if Putin took his offensive beyond Ukraine’s borders onto NATO territory, the United States could get drawn into it.
That’s because Washington is obliged by the North Atlantic Treaty to defend its allies, some of whom fear they are Russian targets.
“Make no mistake. The United States will defend every inch of NATO territory with the full force of American power,” Biden said Tuesday.
“An attack against one NATO country is an attack against all of us.”
Biden also said that if any American in Ukraine is targeted by Russia, “We will respond forcefully.”
Beyond the seemingly unlikely scenario of Putin deliberately extending an invasion beyond Ukraine, there is a risk that even a limited war could spread as a result of an accident, a miscalculation or a misunderstanding.
Once the fighting started, a bit of bad luck could lead to more conflict.
Even if Putin were to back off in coming days and pursue a negotiated path to his security goals, the enormous tension created by his buildup of forces on Ukraine’s borders could have a lasting impact elsewhere in Europe.
US allies on NATO’s eastern front, particularly the Baltic states of Estonia, Latvia and Lithuania, which were once part of the Soviet Union, may press for a bigger and more permanent US military presence.
A full range of scenarios for ending the Ukraine crisis and managing relations with Russia will be on the table Wednesday when US Defense Secretary Lloyd Austin joins a two-day meeting of NATO defense ministers in Brussels.
Austin is expected also to meet jointly with his counterparts from the three Baltic states.
Biden has ordered about 5,000 extra troops, including a senior Army general, to Europe to demonstrate US commitment to eastern flank allies like Poland and Romania that share borders with Ukraine.
Some of those extra soldiers include elements of an airborne infantry combat brigade in southern Poland, not far from the Ukrainian border, preparing for the possibility of being asked to temporarily house and assist civilians who would flee Ukraine in the event of a Russian invasion.
Aside from the risk of an unintended or unexpected incident along Ukraine’s western borders, the scope of Russia’s military buildup and its options for disrupting Ukrainian and Western communications offer possibilities for an escalation that could draw in the United States.
James Stavridis, a former chief commander of NATO forces in Europe and a retired Navy admiral, says two wild cards in the Ukraine crisis are the prospect of an escalation to cyberwar and the possibility of an unintended escalation in the Black Sea, where Ukraine’s small fleet is caught between the bigger navies of Russia and NATO nations.
“A missile that goes astray and strikes a non-combatant, say a US destroyer, could be explosive,” Stavridis said.
He believes cyber warfare would be a central feature of any Russian attack on Ukraine, with the United States and its allies attempting to protect the Ukrainian military’s ability to communicate with and command forces in the field, and to preserve the electric grid and other civilian infrastructure.
“That could easily lead to Russian retaliation in the cyber world, broadening the conflict quickly and dangerously,” Stavridis said.
Biden cited a similar unconventional danger.
“If Russia attacks the United States or our allies through asymmetric means, like disruptive cyber attacks against our companies or critical infrastructure, we’re prepared to respond,” he said.
Jim Townsend, who was the Pentagon’s top Europe and NATO policy official throughout the Obama administration, said he sees little chance that Putin would deliberately extend an offensive beyond Ukraine unless he believed Biden would be unwilling to go to war to defend NATO allies.
More likely, he said, is an unintended scenario such as a Western military aircraft getting shot down along the border.
“My great fear is that we go down a slippery slope that nobody wants,” he said.
