Ukraine: EU wrestles with how to inflict sanctions ‘pain’ on Russia

After Belarus sent a fighter jet to intercept a Ryanair flight carrying a young dissident, who was later arrested and detained, the EU hit back with sanctions designed to inflict a “substantial cost” on anyone who supported Alexander Lukashenko’s dictatorial regime.

But there was a catch. It turned out that the sanctions imposed in 2021 on the lucrative petrochemicals and potash industries in Belarus applied only to new contracts, meaning that their impact would be gradual. And the penalties placed on potash came with specifications that excluded around 80 per cent of the commodity exported by the east European nation.

The Belarusian opposition leader, Sviatlana Tsikhanouskaya, warns of “regrettable” omissions in the package, which also included measures against the finance sector, and is demanding that new targets be added. “We should not underestimate the regime’s ability to minimise the full impact of the EU’s sanctions,” she says.

Her complaints carry particular resonance as Europe discusses with the US creating what they have billed as one of the hardest-hitting sanctions packages the west has ever deployed, this time against Russia.

The western allies are seeking tougher penalties than those imposed after Moscow’s invasion of Crimea in 2014, hoping the threat of draconian measures will deter President Vladimir Putin from invading the country after massing more than 100,000 troops at its border.

Belarusian opposition leader Sviatlana Tsikhanouskaya at the centre of a peaceful protest
Belarusian opposition leader Sviatlana Tsikhanouskaya says there are ‘regrettable’ omissions in the sanctions package designed to inflict a cost on Alexander Lukashenko’s dictatorial regime © Michael Sohn/Reuters

But Moscow knows the EU faces formidable hurdles when it comes to applying sanctions. For a start, it needs unanimity among the 27 member states — many of which have deep economic ties to Russia. Its capitals are also accused by diplomats and lawyers of having a patchy record when it comes to speedily enforcing sanctions programmes.

EU officials say they are optimistic that European capitals are ready to swallow the economic pain that would come with sanctions on the Russian financial sector as well as parts of its energy and high-tech industries. “We all hope that diplomacy will succeed,” Ursula von der Leyen, the European Commission president, told the Financial Times on Friday, “but we also know that when it’s time to use this robust package we are ready.”

The ultimate test will only come when leaders convene for an emergency EU summit should Russia attack Ukraine.

“It is vital that the west maintains its unity in the face of this threat from Russia — and that means we have to have the EU fully on board,” says Edward Fishman, an adjunct fellow at the Center for a New American Security and a state department official during the Obama administration. “Right now all the signals from US and European leaders point to a remarkable degree of consensus on the sanctions effort. It’s crucial that this is maintained.”

Critics say the Belarus sanctions embody many of the frailties and limitations of the EU’s framework. The measures against the Lukashenko regime fell short of some officials’ ambitions because of carve-outs requested by EU countries seeking protection for some of their own companies trading with Belarus, and because of the time taken to implement and then enforce the measures.

The sanctions on Belarus’s petrochemicals, potash and financial sectors — the first with any teeth — were agreed almost a year after Lukashenko began his brutal crackdown on his country’s opposition in August 2020. Analysts say the early impact on Belarus’s potash export volumes was limited, while prices soared — giving the country’s state-controlled potash groups an unexpected shot in the arm.

“Ultimately sanctions are only a tool towards something, and the moment has passed [in Belarus],” says Maria Shagina, visiting fellow at the Finnish Institute of International Affairs. “The time [window] when you can apply pressure and translate it into something is quite narrow.”

The ‘lowest common denominator’

The EU has streamlined its sanctions machine in recent years. But all 27 member states must still unanimously agree on sanctions before they can be imposed. It is a very different system from the US where, in the words of Brian O’Toole of the Atlantic Council, action is taken by “three agencies that work for one president”.

The drawn-out bureaucratic process gives greater scope for member states to demand carve-outs to protect their own industries, complained one official involved in the Belarus process.

“It is not easy for the commission when they have member states looking over their shoulder as they draw up sanctions, saying: ‘No, you’re overstepping your competences here’ or ‘we need a loophole there’,” says an EU official. “It slows it down and weakens the result. The outcome is not the highest common denominator but the lowest in terms of what member states can stomach.”

Ursula von der Leyen, the European Commission President
‘We all hope that diplomacy will succeed,’ says Ursula von der Leyen, the European Commission president, ‘but we also know that when it’s time to use this robust package we are ready’ © John Thys/AFP/Getty Images

The commission defends the multiple rounds of Belarus sanctions — which targeted people, entities, sectors of the economy and financial services — insisting they are designed to be “progressive”, meaning they can be scaled up or down depending on Minsk’s behaviour.

But there are similar questions over the effectiveness of the 2014 sanctions on Russia. The US and EU were wrongfooted by Putin’s actions, leading to a reactive response and fractious internal discussions as they ratcheted up their measures. The toughest steps were only enacted after the shooting down of Malaysia Airlines MH17 over Ukraine by a Russian missile in July 2014.

The penalties included restrictions on companies and individuals with close ties to the Russian government, as well as measures related to the defence, energy and finance sectors. They failed to force Russia out of Crimea or to stifle Putin’s military ambitions in his neighbour — although some western diplomats believe the measures dissuaded Putin from further escalation in Ukraine’s Donbas region which was seized by Russian-backed separatists in 2014.

Differences between the US and EU sanctions regimes undermined their effectiveness. French energy company Total, for example, was able to continue partial ownership and funding of the construction of two major gas projects in Russia’s arctic owned by Novatek, even as US banks pulled their support. While ExxonMobil withdrew from joint venture deals with Kremlin-controlled oil company Rosneft, Italy’s Eni stood by its operating project until 2018.

Overall the sanctions meant Russia’s annual growth from 2014 to 2018 fell short of prior expectations by 0.2 per cent, according to an IMF report in 2019, meaning they had a much smaller impact than, for instance, the decline in the oil price during the same period.

Chart showing the cost of sanctions to the Russian economy. Annual GDP average, 2014-18 (%) for sanctions, oil, fiscal and financial & monetary factors

Diplomats warn that Europe’s regime suffers further from uneven enforcement. The US relies on a single powerful body — the Office of Foreign Assets Control — which has wide latitude to enforce sanctions and track their effect.

In Europe enforcement is handled at a national level, and officials say its effectiveness varies dramatically between member states. Tom Keatinge of the Royal United Services Institute think-tank, argues that once sanctions are agreed at the EU level, there is sometimes the impression that “everyone has flopped over the finishing line and said ‘thank God, we can go off and think about something else’.”

Restoring brittle EU-US relations

The commission tacitly accepted the need for improvement 12 months ago, when it put out a communication proposing a more “robust and rapid implementation and enforcement” of the union’s sanctions, including reforms to bolster information sharing between capitals.

Yet radical change, such as the creation of an EU agency to take sanctions enforcement powers from national governments, remains unlikely. “Which country is going to give up more sovereignty in terms of things that can hurt their economy, and tell their voters that Europe now makes these decisions?” asks a senior EU official.

The crucial difference between the current planning and 2014, EU officials say, is that the detailed work between allies is being done early and proactively, in the hope it will deter Putin from taking hostile action.

The headquarters of the Sberbank PJSC in Moscow
Sberbank is among the Russian banks said to be targeted by new US and EU sanctions should Russia invade Ukraine © Andrey Rudakov/Bloomberg

Intensive discussions between the US and EU over Russian sanctions have now been under way for three months. They follow a period of brittle relations in the wake of America’s chaotic military withdrawal from Afghanistan, which European officials criticised as ill-co-ordinated, and the White House’s nuclear submarine agreement with the UK and Australia, which excluded France and triggered a diplomatic spat with Paris.

Policymakers on both sides of the Atlantic stress the goal is not to alight on exactly the same sanctions against Russia, but to forge a co-ordinated approach, in contrast to the chaotic events of the Trump administration, which imposed sanctions on aluminium giant Rusal in 2018 without consulting allies.

Officials say the unusual volume of intelligence and public briefings by the US on the Russian build-up helped heap pressure on reluctant EU governments to back sanctions. Adding to that pressure is the awareness that China is closely watching the planning, they say, as it gauges western powers’ ability to rally in the face of a shared security threat.

Victoria Nuland, the US under-secretary of state for political affairs, told the FT in January that a key goal in discussions was to find ways to fairly share the economic burden of the sanctions between European countries.

Unidentified troops outside the Crimean parliament building in March 2014 next to a sign that reads ‘Crimea Russia’
Unidentified troops outside the Crimean parliament building in March 2014 next to a sign that reads ‘Crimea Russia’. Sanctions that followed Russia’s annexation of Crimea were undermined by different approaches by the US and EU © Sean Gallup/Getty Images

“We always say that our goal needs to be to hurt Russia more than we hurt ourselves if we have to go in this direction,” she said, stressing that the EU and US packages didn’t necessarily have to be “identical” but did have to be “equally painful”.

The package taking shape will cover energy, banking, high-tech companies and oligarchs with close links to Putin. Critically, western capitals are more willing to inflict pain on the Russian banking system than in 2014, when measures against the big state-owned banks were relatively restrained. Sanctions on Russia’s biggest financial institutions, including Sberbank, VTB, Gazprombank, Alfa-Bank, and The Russian Direct Investment Fund are all under consideration, say diplomats.

In addition, the allies are willing to hit gas producers, as well as oil companies — despite anxiety over Europe’s reliance on Russian gas. That means the controversial Nord Stream 2 pipeline through the Baltic Sea “cannot be removed from the table” as far as sanctions are concerned, von der Leyen has previously said.

US and EU officials are also seeking to finalise measures preventing exports to Russia of an unprecedented range of key technologies produced by western companies, mirroring steps taken by Washington to prevent Chinese telecoms company Huawei from using US-made components.

One EU diplomat says disagreements remain over the detailed scope of all the products and companies to be targeted. But the EU’s participation in this part of the package is seen as particularly critical given the scale of its exports to Russia, which totalled nearly €80bn in 2020.

Satellite images show the military build-up at the Pogonovo training ground near the Ukraine border in west Russia
Satellite images show the military build-up at the Pogonovo training ground near the Ukraine border in west Russia © Maxar Tech/AFP/Getty

The aim is to hold back high-tech components that Russia cannot easily replace by turning to suppliers in other parts of the world, in areas ranging from artificial intelligence to quantum computers and lasers, degrading Russia’s ability to diversify its fossil-fuel-reliant economy.

The overall proposals “look to be a dramatic broadening and strengthening of the [2014] measures,” says Erica Moret, a sanctions specialist at the Graduate Institute, Geneva.

In Washington, Europe’s emerging willingness to hit Putin hard is seen as the result of destabilising actions they blame on Moscow which have multiplied in the past decade.

These range from election interference and cyber attacks to the Skripal poisoning in the UK and the presence of Russian mercenaries in Mali. US officials say they believe an invasion of Ukraine would be a bridge too far for Europeans to tolerate in terms of the continent’s security.

The Europeans are weighing the cost of imposing sanctions “against the counterfactual of an invasion in the heart of Europe, and . . . the impact it would have to their business environment and their economic conditions,” says a Biden administration official.

A ‘clear understanding’ of the Russia threat

Von der Leyen says she now sees a “growing sense of unity” among the 27 member states as they observe Russian actions, including “the massive military build-up around Ukraine and in Belarus, the continued cyber attacks and the disinformation campaigns to prepare the ground.

“Many were caught by surprise in 2014,” she adds, “but this time we have a clear understanding of the magnitude of what Russia could do.”

Björn Seibert, her head of cabinet, has been holding what diplomats describe as “confessional” meetings with small groups of EU ambassadors to understand their pain thresholds with regard to the options on the table.

Russian President Vladimir Putin and Hungarian Prime Minister Viktor Orban meeting in Moscow last week
Viktor Orban, left, with Russian president Vladimir Putin in Moscow last Tuesday. The Hungarian prime minister, whose support would be needed for any sanctions package to pass, criticised the mooted EU measures against Moscow © Alexei Nikolsky/Kremlin/Reuters

The goal within the commission is to have a detailed set of sanctions ready, which could be upgraded or downgraded depending on the gravity of any Russian incursion. These would be signed off in an emergency summit of EU leaders if they decide action is needed, all in close co-ordination with the US, UK and other allies.

Diplomats insist that being too prescriptive in advance about the triggers needed for penalties to be imposed risks backfiring. “You wouldn’t want to define thresholds in advance, because then Russia can seek to stay below them,” says one.

The risk remains, however, that unity between the 27 member states falters in the face of hostile or covert acts by Putin that fall short of an outright invasion but still have the effect of further destabilising Ukraine.

A number of member states — among them Italy and Austria — have deep business links with Moscow, while Germany is hugely exposed to disruptions in the energy markets given it draws more than half of its gas imports from Russia.

Viktor Orban, the Hungarian prime minister, last week criticised the mooted measures on a trip to Moscow, saying they were “doomed to failure” — although officials remain hopeful that he will fall into line.

Some experts argue that the power and extraterritorial reach of US sanctions are so massive that any weaknesses in the EU response should not be debilitating when it comes to applying pressure on Putin.

If Russian banks are subjected to tough new sanctions by the US, for example, western financial institutions will steer well clear of them for fear of falling foul of the US authorities. But O’Toole of the Atlantic Council insists that having the EU fully on board will be critical to closing all loopholes and depriving Putin of any room for manoeuvre.

“Let’s be clear — sanctions only work as long as everybody plays ball,” says a senior EU official. “That is the bottom line.”

Additional reporting by Emiko Terazono in London and James Politi in Washington

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