Russian sanctions are a big deal for Europe

WhiteHouse.gov

Article Highlights

  • New EU sanctions increase risk of Russia using energy leverage come winter

    Tweet This

  • Russian economic downturn could hurt EU banks and consumer confidence

    Tweet This

  • Large reserves allow Russians to weather new sanctions for considerable period

    Tweet This

In the context of ample global liquidity, nothing seems to faze the international financial markets. Tuesday's announcement by the Europeans of major economic sanctions on Russia was no exception. For despite the serious adverse implications that these sanctions might have for the fragile European economic recovery, global and European markets were barely impacted by that announcement and they continued to trade at very lofty levels.

Notwithstanding the financial market's seeming indifference to the new sanctions, the European and U.S. escalation of sanctions on Russia's financial, energy and defense sectors would seem to be highly significant for the European economic outlook for a number of reasons. First, these sanctions underline that relations between the West and Russia have now plumbed new post-1989 lows. They would also seem to indicate that both the U.S. and the Europeans now expect a prolonged period of Russian intransigence towards Ukraine, especially given the strong domestic support that Russian President Vladimir Putin enjoys for his Ukrainian policy. Second, these sanctions have to raise the real possibility that the Russians will both retaliate with sanctions of their own and withhold natural gas supplies to Europe. That in turn could result in a further downward spiral in relations between Russia and the West. Third, these sanctions come at a time when the European economic recovery already shows signs of stalling and at a time when Europe faces the risk of slipping into outright deflation.

While it is true that for most European countries, trade with Russia represents but a small part of their overall international trade, souring relations with Russia could have a major impact on the European economy for a variety of reasons. First, since Russia still supplies Europe with around one-third of its energy needs, there has to be the risk that at some stage Russia uses its energy lever, particularly with the approach of the European winter. Second, the Russian economy is very much more integrated into the global financial system than was Iran, which has to raise the risk that there could be an untoward fallout on European banks from any major disruption to the Russian economy. Third, European business and consumer confidence, which has already been impacted by heightened geopolitical uncertainty, could take a decided turn for the worse if it became clear that we indeed were in for a prolonged period of poor relations between Russia and Europe.

Sadly, for the European economy, it would seem unlikely that there will be any early thawing in relations between Russia and the West anytime soon. In part, this is because for domestic political reasons it suits Putin to keep the Ukrainian crisis on a slow boil. In part, it is also because Russia presently has very large international reserves, which puts Russia in a good position to weather the recently imposed sanctions for a considerable period of time without risking plunging the economy into a deep crisis.

 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

AEI Election Watch 2014: What will happen and why it matters
image A nation divided by marriage
image Teaching reform
image Socialist party pushing $20 minimum wage defends $13-an-hour job listing
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Monday, October 20, 2014 | 2:00 p.m. – 3:30 p.m.
Warfare beneath the waves: The undersea domain in Asia

We welcome you to join us for a panel discussion of the undersea military competition occurring in Asia and what it means for the United States and its allies.

Tuesday, October 21, 2014 | 8:30 a.m. – 10:00 a.m.
AEI Election Watch 2014: What will happen and why it matters

AEI’s Election Watch is back! Please join us for two sessions of the longest-running election program in Washington, DC. 

Wednesday, October 22, 2014 | 1:00 p.m. – 2:30 p.m.
What now for the Common Core?

We welcome you to join us at AEI for a discussion of what’s next for the Common Core.

Event Registration is Closed
Thursday, October 23, 2014 | 10:00 a.m. – 11:00 a.m.
Brazil’s presidential election: Real challenges, real choices

Please join AEI for a discussion examining each candidate’s platform and prospects for victory and the impact that a possible shift toward free-market policies in Brazil might have on South America as a whole.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.